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Answer: Bond 3
The correct answer is **C** because: 1. **Coupon Effect**: For bonds with the same time-to-maturity, a lower-coupon bond (Bond 3) will experience a greater percentage price change than a higher-coupon bond (Bond 1) when market discount rates change by the same amount. 2. **Maturity Effect**: For bonds with the same coupon rate, a longer-term bond (Bond 3) will exhibit a greater percentage price change than a shorter-term bond (Bond 2) when market discount rates change by the same amount. Thus, Bond 3, with its lower coupon rate and longer maturity, is expected to have the greatest percentage price change.
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An analyst evaluates three option-free bonds with the following characteristics:
A
Bond 1
B
Bond 2
C
Bond 3