Assuming all else is constant,which of the following statements is CORRECT? A) Other things held constant,a 20-year zero coupon bond has more reinvestment risk than a 20-year coupon bond. B) Other things held constant,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. C) From a corporate borrower's point of view,interest paid on bonds is not tax-deductible. D) Other things held constant,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. E) 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.

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Quizplus · Accepted Answer

It is relatively easy to eliminate a,c,and d.When choosing between b and e,think about the graph that shows the relationship between a bond's price and the going interest rate.This curve is concave,indicating that at any interest rate,the decline in price from an increase in rates is less than the gain in price from a similar interest rate decline.It would be easy to confirm this statement with an example.

Assuming All Else Is Constant,which of the Following Statements Is