ssuming all else is constant, which of the following statements is CORRECT? a. A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond. b. For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate. c. From a corporate borrower's point of view, interest paid on bonds is not tax-deductible. d. For any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate. e. Price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases.

Answer: b. For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate

Explanation:

This is very true. If market rates reduce by 1.0%, there is a larger drop in the price of a bond than the amount a bond gains in price if interest rates increase by that same 1.0%.

This is why the graph that relates bond prices to yield is concave and I attached a graph as proof.

Notice how the fall in price is greater when interest rate increases.

divyamadaan8054 divyamadaan8054 · Answer 2 · 2021-12-17T15:52:59+01:00

Yield-to-maturity is the interest rate an investor would earn if they reinvested every bond coupon payment at a constant interest rate until the bond's maturity date.

Hence, correct option is B.

"For a bond of any maturity, a 1.0% point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from a 1.0% point decrease in the interest rate."

Consider or use a graphical illustration of the link between the price of a typical bond and the current interest rate. The graph will show a cupped curve, illustrating that for any interest rate, the price decrease from an increase in rates is not comparable to the price increase from a comparable rate reduction .

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