Which one of the following statements is correct if the market rate decreases to 7 percent?

Question

Mason's has a 5-year, 8 percent annual coupon bond with a $1,000 par value. Dixon's has a 10-year, 8 percent annual coupon bond with a $1,000 par value. Both bonds currently have a yield to maturity of 8 percent. Which one of the following statements is correct if the market rate decreases to 7 percent?

A.	Mason's bond will increase in value by 4.10 percent and Dixon's bond will increase in value by 7.02 percent.
	B.	Mason's bond will decrease in value by 4.10 percent and Dixon's bond will decrease in value by 7.02 percent.
	C.	Mason's bond will increase in value by 7.02 percent and Dixon's bond will increase in value by 4.10 percent.
	D.	Both bonds will increase in value by 4.10 percent.
	E.	Dixon's bond will increase in value by 6.87 percent.

Answer 1

Both will increase because their rate is higher than market. Dixon's will increase by more than Mason's because it has the longer term. The only choice where reflecting this is "A."