Question
Assume that Bond A and Bond B are identical in every way except for the coupon rate (i.e., both bonds have the same par value,
Assume that Bond A and Bond B are identical in every way except for the coupon rate (i.e., both bonds have the same par value, maturity, and yield to maturity or required rate of return). Bond A has a 12% coupon rate and Bond B is a zero coupon bond. Both bonds have a yield to maturity of 8% per year. If interest rates increase so that the yield on both issues increases to 10%, what would happen to the price of the bonds?
Question 9 options:
| The price of the zero coupon bond would increase, but the price of the 12% coupon bond would decrease. |
| The price of the zero coupon bond would decrease, but the price of the 12% coupon bond would increase. |
| Both issues would increase in price. |
| Both issues would decrease in price. |
| None of the above are necessarily true. |
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