Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds is noncallable, has a maturity of 10 years, and has a yield to maturity of 10%. Which of the following statements is CORRECT?

a. If the bonds' market interest rate remains at 10%, Bond Z's price will be lower one year from now than it is today.

b. Bond X has the greatest reinvestment risk.

c. If market interest rates decline, the prices of all three bonds will increase, but Z's price will have the largest percentage increase.

d. If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today.

e. If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same.

c. If market interest rates decline, the prices of all three bonds will increase, but Z's price will have the largest percentage increase.

Explanation:

A Bond's yield to maturity represents i.e market rate of interest on similarly priced bonds or investor's expected rate of return. Higher the yield to maturity, lower will be value of a bond i.e indirect relation.

When yield to maturity i.e YTM of a bond is equal to coupon rate of payments, such bonds sell at par. When YTM is higher than the coupon rate of payments, such bonds sell at a discount. Conversely, when YTM is lower than the coupon rate of payments, such bonds sell at  a premium.

In the given case, the present value of Bond Z would be the highest, and that of Bond X would be lowest.

If market interest rates fall i.e YTM falls, it will lead to a rise in the value of all three bonds but since, coupon rate of Bond Z was already higher than existing YTM rate, the rise in it's value would be the highest. i.e largest percentage increase.

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