Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, ________.
A) both bonds will increase in value but bond A will increase more than bond B
B) both bonds will increase in value but bond B will increase more than bond A
C) both bonds will decrease in value but bond A will decrease more than bond B
D) both bonds will decrease in value but bond B will decrease more than bond A
Correct Answer:
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