Consider Two Recent Bond Issues by Microsoft: Both Have Face

question 1

Multiple Choice

Consider two recent bond issues by Microsoft: both have face values of $1,000 and coupon rates of 10% but one bond (call it the short bond) has five years to maturity and the other,the long bond,has twenty years to maturity.Assume that yields fall from 15% to 5%.Which bond will experience a greater price increase,and by how much?

• A) Long bonds by $384
• B) Short bonds by $384
• C) The change in price is equal for both bonds
• D) Long bonds by $936
• E) Short bonds by $936

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