Answer:
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.
