Assume you own a consol (a perpetual bond) and a five-year maturity bond, each with the same current yield.What will happen if the market interest rate decreases from 10% to 8%?

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Quizplus · Accepted Answer

When market interest rates decrease, the value of existing bonds increases because their fixed interest payments become more attractive compared to new bonds issued at the lower current rates. Consols, being perpetual bonds, have an infinite duration, making their prices more sensitive to changes in interest rates compared to bonds with finite maturities. Therefore, the value of the consol will increase more than the value of the five-year bond.

Assume You Own a Consol (A Perpetual Bond) and a Five-Year