# This flashcard is just one of a free flashcard set. See all flashcards!

59

Which of the following is true?

A.When interest rates in the economy increase, all bond prices increase

B. As its coupon increases, a bondâ€™s price decreases

C.Longer maturity bonds are always worth more that shorter maturity bonds when the coupon rates are the same

D.None of the above

A.When interest rates in the economy increase, all bond prices increase

B. As its coupon increases, a bondâ€™s price decreases

C.Longer maturity bonds are always worth more that shorter maturity bonds when the coupon rates are the same

D.None of the above

Answer: D

When interest rates increase the impact of discounting is to make future cash flows worth less. Bond prices therefore decline. A is therefore wrong. As coupons increase a bond becomes more valuable because higher cash flows will be received. B is therefore wrong. When the coupon is higher than prevailing interest rates, longer maturity bonds are worth more than shorter maturity bonds. When it is less than prevailing interest rates, longer maturity bonds are worth less than shorter maturity bonds. C is therefore not true. The correct answer is therefore D.

When interest rates increase the impact of discounting is to make future cash flows worth less. Bond prices therefore decline. A is therefore wrong. As coupons increase a bond becomes more valuable because higher cash flows will be received. B is therefore wrong. When the coupon is higher than prevailing interest rates, longer maturity bonds are worth more than shorter maturity bonds. When it is less than prevailing interest rates, longer maturity bonds are worth less than shorter maturity bonds. C is therefore not true. The correct answer is therefore D.

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015