Question

1. Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pay coupons of $120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, a. both bonds will increase in value but bond A will increase more than bond B b. both bonds will increase in value but bond B will increase more than bond A c. both bonds will decrease in value but bond A will decrease more than bond B d. both bonds will decrease in value but bond B will decrease more than bond A

Answer 1

Answer: Option d is correct.

Bond A Bond B 2 Face value 1000 1000 3 Coupon payment 120 120 4 Time period 5 Yield to maturity 14% 14% 6 Present value= ($931.34) ($922.23) 7 Formula used: PV(S5,S4,S3,S2) PV(T5, T4,13,12)

We changed the yield to maturity and find that the present value of bond A as $931.34 and bond B as $922.23

So, clearly the value of both the bonds decreased from $1000 and bond B decreased more in value.