If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value? Group of answer choices A 10-year bond with an 8% coupon. A 10-year zero coupon bond. A 10-year bond with a 12% coupon. A 1-year zero coupon bond. A 1-year bond with an 8% coupon.

Question

Tristian Randolph

Business

5 August, 06:21

If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value? Group of answer choices A 10-year bond with an 8% coupon. A 10-year zero coupon bond. A 10-year bond with a 12% coupon. A 1-year zero coupon bond. A 1-year bond with an 8% coupon.

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Hayden · Answer 1

A 10-year bond with an 8% coupon

Explanation:

As more time to maturity more of the cashflow of the security are affected bu the change in how to measure th time value of money therefore, more percnetage change.

This rolls out the 1-year options as we have options for 10 years.

Also, we should consider how the cash flow are distributed.

As the bonds has both the maturity and coupon payment which are spread over time, we should check if the decrease from 8% to 7% is more represented in the price than the variation 12% to 11%

As the 1% represent 0.125 of the rate while the other impact is lower the bond of lower rate will be more price sensitive