Assume that a noncallable 10-year T-bond has a 12% annual coupon, while a 15-year noncallable T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT?
A. If interest rates decline, the prices of both bonds would increase, but the 15-year bond would have a larger percentage increase in price.
B. If interest rates decline, the prices of both bonds would increase, but the 10-year bond would have a larger percentage increase in price.
C. The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium.
D. The 10-year bond would sell at a premium, while the 15-year bond would sell at par.
E. If the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond would increase, but the price of the 15-year bond would fall.
Answer: A
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