John owns a corporate bond with a coupon rate of 8% that matures in 10 years. Bill owns a corporate bond with a coupon rate of 12% that matures in 25 years. If interest rates go down, then:

A. the value of John's bond will decrease and the value of Bill's bond will increase.

B. the value of both bonds will increase.

C. the value of Bill's bond will decrease more than the value of John's bond due to the longer time to maturity.

D. the value of both bonds will remain the same because they were both purchased in an earlier time period before the interest rate changed.

Question

Business

Abbigail Brock

18 November, 07:55

John owns a corporate bond with a coupon rate of 8% that matures in 10 years. Bill owns a corporate bond with a coupon rate of 12% that matures in 25 years. If interest rates go down, then:

A. the value of John's bond will decrease and the value of Bill's bond will increase.

B. the value of both bonds will increase.

C. the value of Bill's bond will decrease more than the value of John's bond due to the longer time to maturity.

D. the value of both bonds will remain the same because they were both purchased in an earlier time period before the interest rate changed.

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Answers (1)

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Ariana Lutz · Answer 1

B. the value of both bonds will increase.

Explanation:

Bonds are known to be a financial security that shows or holds a promise to repay a fixed amount of funds.

There is an oppose relationship in terms of bond and an increase in thet interest rates, will lead to drop in the value of bonds and whenor if interest rates drops, there will be a corresponding increase in the bonds value. since both the bonds owned by John, he would still receive fixed interest payments which will be higher than the interest amount available on new bonds which are issued at lower interest rates and the value of both of these bonds would increase automatically