Consider Two Recent Bond Issues by Microsoft: Both Have Face

question 76

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.Which bond do you expect to be more sensitive to a change in yields? That is,for a given change in yield which bond (the long or the short) will experience a greater change in price?

• A) The long bond
• B) They are equally sensitive.
• C) The short bond

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Definitions:

Economies of Scale

Cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale.

Undifferentiated Products

Goods or services that are viewed as interchangeable with others in the market, lacking distinct features to stand out from competitors.

High Switching Costs

High switching costs are barriers that prevent customers from changing products or services, due to financial, emotional, time-related, or effort-based factors.

Complex Backward Integration

A strategy where a company expands its role to fulfill tasks formerly completed by businesses up the supply chain, but with more intricate and multifaceted connections or processes.