** Please show work or explain If interest rates fall from 8 percent to 7 percent,...
** Please show work or explain
If interest rates fall from 8 percent to 7 percent, which of the following bonds will have the largest percentage increase in its value? (If you are uncertain, do the examples yourself before answering!)
a. A bond with 10 years to maturity, and a coupon rate of ZERO percent.
b. A bond with 10 years to maturity, and a coupon rate of TEN percent.
c. A bond with 5 years to maturity, and a coupon rate of ZERO percent.
d. A bond with 5 years to maturity, and a coupon rate of TWELVE percent.
e. None of these. If rates fall from 8 percent to 7 percent, the value of existing bonds will decrease in value, not increase.
Homework Answers
Answer is option A according to the working given below:
Since 10 year zero coupon bond has the maximum change hence answer is "A bond with 10 years to maturity, and a coupon rate of ZERO percent."
| n | PMT | r=8% | r=7% | %change |
| 10 | 0 | ₹ -463.19 | ₹ -508.35 | 9.748799 |
| 10 | 100 | ₹ -1,134.20 | ₹ -1,210.71 | 6.745345 |
| 5 | 0 | ₹ -680.58 | ₹ -712.99 | 4.761061 |
| 5 | 120 | ₹ -1,159.71 | ₹ -1,205.01 | 3.906281 |
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