Bond A and Bond B have the same coupons Bond A has 3 years t

Bond A and Bond B have the same coupons. Bond A has 3 years to maturity and Bond B has 20 years to maturity. If the required rate on all bond decreases by 1%:

A. Bond A will have a greater rise in value than Bond B

B. Bond B will have a greater rise in value than Bond A

C. Bond A will have a greater decrease than Bond B

D. Bond B will have a greater decrease in value than Bond A

E. None of the above

Solution

B. Bond B will have a greater rise in value than Bond A , the longer the maturity , the more risk in the bond, but yield will be higher in that.

For example. If yiled is 10%, So ,Bond A (present value at 10%) =$1000

Bond B(present value at 10%) =$1000

At yield 9% , then Bond A (present value at 9%) =$1025.31

Bond B(present value at 9%) =$1091.29