Each Bond in the Table Has a Face Value of |

question 36

Multiple Choice

$$\begin{array} { | c | c | c | c | c | } \hline \text { Bond } & \text { Coupon Rate } & \text { Maturity } & \text { Price } & \text { Yield } \\\hline \text { T-Note Strip } & 0 & 10 & 70.69 & 3.5 \% \\\hline \text { T-Bill } & 0 & 1 & 96.62 & 3.5 \% \\\hline \text { 8-year T-Note } & 5 \% & 8 & 110.31 & 3.5 \% \\\hline \text { 7-year T-Note } & 6.5 \% & 7 & 118.34 & 3.5 \% \\\hline\end{array}$$ Each bond in the table has a face value of $100. The coupon bonds pay annual coupons, and the next coupon is due in one year. Assume that the yield curve is flat and all yields are currently 3.5%. If interest rates are forecast to rise to 4% from 3.5%, then which bond's price will decline by the greatest percentage amount?

• A)T-Note Strip
• B)T-Bill
• C)8-year T-Note
• D)7-year T-Note

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Definitions:

Descartes

René Descartes, a 17th-century French philosopher known for his statement "Cogito, ergo sum" and contributions to modern philosophy and mathematics.

Idealist

A person who holds the metaphysical view that mind and ideas are the ultimate reality.

Measurable

Capable of being measured or quantified.

Testable

A characteristic of a hypothesis or theory that it can be subjected to empirical experiments or observations to determine its validity or accuracy.