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Assuming the term structure is flat at 5%, look at the bonds below. (Bond 1)...

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Accounting

Assuming the term structure is flat at 5%, look at the bonds below.

(Bond 1) a 25 year zero coupon bond.

(Bond 2) a 10 year floating rate bond that pays LIBOR (benchmark interest rate).

(Bond 3) a 5 year 5% coupon bond.

(Bond 4) a 5 year 6% coupon bond.

Read these three statements.

(i) Bond 1 has a duration of 25 years.

(ii) Compared with Bond 4, Bond 3 is more sensitive to interest rate fluctuation.

(iii) Bond 2 has the shortest duration among all four bonds.

a. Only (i) is correct.

b. Only (i) and (ii) are correct.

c. All are correct.

d. None is correct.

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