Two 20-year corporate bonds are issued at par, with stated interest rates of 10%. One issue is puttable at par in 5 years, while the other is puttable at par in 10 years. If interest rates rise by 200 basis points shortly after issuance, which statement is TRUE? a. The bond puttable in 5 years will depreciate more than the bond puttable in 10 years
b. The bond puttable in 10 years will depreciate more than the bond puttable in 5 years
c. Both bonds will depreciate by equal amounts
d. The rate of depreciation depends on the credit rating of the bonds

b. The bond puttable in 10 years will depreciate more than the bond puttable in 5 years

Explanation:

Data provided in the question

20 -year corporate bond i.e issued at par at 10%

One issue is for 5 years

other issue is for 10 years

Now if the interest rate rise by 200 basis points

So,

Based on the above information

If a bond is issued at a future date, any price drop due to higher interest rates will be eliminated as the holder is able to return the bond to the issuer earlier

Hence, the option B is correct

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