Assume that a 10-year Treasury bond has a 12% annual coupon,while a 15-year T-bond has an 8% annual coupon.Assume also that the yield curve is flat,and all Treasury securities have a 10% yield to maturity.Which of the following statements is correct?

A) If interest rates decline, the prices of both bonds will increase, but the 15-year bond would have a larger percentage increase in price.
B) If interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase in price.
C) The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium.
D) The 10-year bond would sell at a premium, while the 15-year bond would sell at par.

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Danielle White · Accepted Answer

Final Answer : A, Explanation :  When interest rates decline, the prices of existing bonds increase because their fixed coupon payments become more attractive compared to new bonds issued at the lower rates. Longer-duration bonds, like the 15-year bond in this case, are more sensitive to interest rate changes and thus would experience a larger percentage increase in price compared to shorter-duration bonds, like the 10-year bond.

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