Milner's Tools has a 9-year, 7% annual coupon bond outstanding with a $1,000 par value. Carter's Tools has a 10-year, 6% annual coupon bond with a $1,000 par value. Both bonds currently have a
Yield to maturity of 6.5%. Which of the following statements is correct if the market yield increases
To 6.75%?

Question

Quizplus · Accepted Answer

When the market yield increases to 6.75%, the price of a bond with a lower coupon rate, like Milner's, will increase more than the price of a bond with a higher coupon rate, like Carter's. Therefore, Carter's bond will decrease in value by 1.80% (the difference between its coupon rate and the market yield increase), while Milner's bond will only decrease in value by 1.63% (the difference between its coupon rate and the market yield increase).

Milner's Tools Has a 9-Year, 7% Annual Coupon Bond Outstanding