Asked by Vanessa Huynh on May 03, 2024
Verified
Milner's Tools has a 9-year, 7% annual coupon bond outstanding with a $1,000 par value. Carter's Tools has a 10-year, 6% annual coupon bond with a $1,000 par value. Both bonds currently have a yield to maturity of 6.5%. Which of the following statements is correct if the market yield increases to 6.75%?
A) Both bonds would decrease in value by 2.50%.
B) The Milner's bond will increase in value by $16.82.
C) The Milner's bond will increase in value by 1.63%.
D) The Carter's bond will decrease in value by 1.80%.
E) The Carter's bond will decrease in value by $16.82.
Yield To Maturity
The total return anticipated on a bond if the bond is held until its maturity date, including both interest payments and capital gains.
Annual Coupon
The annual interest payment made to bondholders, typically expressed as a percentage of the bond's face value.
Par Value
A nominal value assigned to a share of stock or bond that is typically printed on the face of the certificate.
- Familiarize oneself with how interest rates impact bond prices, particularly how maturity, coupon rates, and yield to maturity contribute to the valuation of bonds.
- Acknowledge the concept of interest rate risk and the influence of bond attributes such as maturity and coupon rates on the bond's propensity to react to shifts in interest rates.
Verified Answer
ZK
Zybrea KnightMay 08, 2024
Final Answer :
D
Explanation :
When market yield increases, bond prices decrease. The bond with the longer duration (Carter's 10-year bond) will experience a greater price change than the bond with the shorter duration (Milner's 9-year bond). Therefore, the statement that Carter's bond will decrease in value is correct, but the specific percentage or amount of decrease for either bond is not provided accurately in the other options.
Learning Objectives
- Familiarize oneself with how interest rates impact bond prices, particularly how maturity, coupon rates, and yield to maturity contribute to the valuation of bonds.
- Acknowledge the concept of interest rate risk and the influence of bond attributes such as maturity and coupon rates on the bond's propensity to react to shifts in interest rates.