Initially the term structure is flat. Economic factors cause the required return for a cash flow to be received in 10 years to increase by 25 basis points. This change in the term structure: A. will have the greatest impact on coupon bonds with maturity less than 10 years. B. will have the greatest impact on coupon bonds with maturity greater than 10 years. C. will have the greatest impact on coupon bonds with maturity of 10 years. D. none of the these answers.
Each bond payment is discounted at its spot rate. I’m guessing that the question means that only the 10 year maturity increases so you have a humped spot rate curve. The largest cash flow (which would be the last coupon to be paid + principal repayment) has the largest weighting in price in the present value calculation. So this payment occurring when the discount rate is increase would have the largest bearing on price. I’ll go with C?
Yeah I’m thinking C as well, have an answer?