- 9 Assume An Efficient Capital Market Consider Two Default Risk Free Bonds Both Bonds Are Zero Coupon Bonds The Maturit 1 (74.72 KiB) Viewed 30 times
9 Assume an efficient capital market. Consider two default risk-free bonds. Both bonds are zero-coupon bonds The maturity of bond A is 3 years and of bond B it is 5 years. Assume a flat term structure of interest rates. The one-year spot rate (ru) is 4.00%. Assume that at t=0 the spot rates unexpectedly increase from 4.00% to 6.0096 while the term structure of interest rates remains flat. 1.0p Which of the statements below is true? As a result of the change in the interest rates, The price decrease in absolute terms of bond A is greater than that of bond B. The prices of both bonds decrease while the yield to maturity of bond A increases and that of B decreases. O The prices of both bonds decrease while the yields to maturity of both bonds increase.