Three bonds were issued by the same company about four years ago. The three bonds have similar maturities and coupons. Bond A is callable, Bond B is putable, and Bond C is option-free.
Statement 1: If interest rates decline, Bonds B and C will have higher market prices than Bond A.
Statement 2: If interest rates increase, Bonds A and C will have higher market prices than Bond B.
A. Both statements are correct.
B. Both statements are not correct.
C. Only statement 1 is correct.
D. Only statement 2 is correct.
2. Statement 1: The segmented market theory assumes that bond market participants are limited to purchase maturities that match the timing of their liabilities.
Statement 2: The preferred habitat theory assumes that bond market participants have a preferred maturity for asset purchases, but may deviate from it if they feel returns in other maturities offer sufficient compensation for leaving their preferred habitat segment.
A. Both statements are correct.
B. Both statements are not correct
C. Only statement 1 is correct.
D. Only statement 2 is correct.