Which of the Following Bonds Would Have the Greatest Percentage

question 20

Multiple Choice

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

• A) 10-year, zero coupon bond
• B) 20-year, 10% coupon bond
• C) 20-year, 5% coupon bond
• D) 20-year, zero coupon bond

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Definitions:

Nominal Rate

The interest rate stated on a bond or loan before adjusting for inflation or other factors.

Lump Sum

A one-time payment executed at a specific moment, rather than several installments spread out over a period.

Nominal Rate

The advertised or stated interest rate on a loan or investment, not taking into account the effect of compounding or inflation.

Monthly Compounding

The process where interest earned is added to the principal sum every month, so that from that moment on, the interest that has been added also earns interest.