Assuming all else is constant, which of the following statements is CORRECT? A) 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. B) From a corporate borrower's point of view, interest paid on bonds is not tax-deductible. C) 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. D) For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (r_d) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate. E) A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond.

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Quizplus · Accepted Answer

This statement is true based on the principle of duration. As interest rates increase, the present value of future cash flows decreases, causing the bond price to fall. The longer the maturity of the bond, the greater the impact of the interest rate change on the price of the bond, which results in a larger capital loss. Conversely, as interest rates decrease, the present value of future cash flows increases, causing the bond price to rise. However, the capital gain resulting from a 1.0 percentage point decrease in the interest rate will be smaller than the capital loss stemming from a 1.0 percentage point increase in the rate.

Assuming All Else Is Constant, Which of the Following Statements