An Investor Holds Two Bonds,one with 5 Years Until Maturity

question 83

Multiple Choice

An investor holds two bonds,one with 5 years until maturity and the other with 20 years until maturity.Which of the following is more likely if interest rates suddenly increase by 2%?

• A) The 5-year bond will decrease more in price.
• B) The 20-year bond will decrease more in price.
• C) Both bonds will decrease in price similarly.
• D) Neither bond will decrease in price, but yields will increase.

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Definitions:

Prime Costs

The direct costs of manufacturing a product, which include raw material and labor expenses directly tied to the production process.

Conversion Costs

These are costs incurred during the manufacturing process to convert raw materials into finished products, including direct labor and factory overhead expenses.

Depreciation Expense

The allocation of the cost of a tangible asset over its useful life.

Factory Overhead

Costs associated with operating a factory that are not directly tied to a specific product, including maintenance, utilities, and salaries of supervisors.