Questions: If interest rates increase by 1%, which bond would likely experience a larger percentage price decrease: a 5-year bond or a 20-year bond with the same coupon rate?

The answer is the last one: The 20-year bond.

Explanation for each option:

1. The 5-year bond: This option is incorrect. Generally, bonds with shorter maturities are less sensitive to interest rate changes compared to bonds with longer maturities. Therefore, a 5-year bond would typically experience a smaller percentage price decrease than a 20-year bond when interest rates increase.

2. The change in price is independent of maturity: This option is incorrect. The price sensitivity of a bond to interest rate changes, known as duration, is dependent on the bond's maturity. Longer-term bonds have higher duration and are more sensitive to interest rate changes, leading to larger price fluctuations.

3. Both bonds would decrease by the same percentage: This option is incorrect. As mentioned, the percentage change in bond prices due to interest rate changes is not the same for bonds with different maturities. Longer-term bonds will generally experience a larger percentage price decrease.

4. The 20-year bond: This option is correct. Longer-term bonds, like the 20-year bond, have higher duration and are more sensitive to interest rate changes. Therefore, they will experience a larger percentage price decrease compared to shorter-term bonds, like the 5-year bond, when interest rates increase.

In summary, the 20-year bond would likely experience a larger percentage price decrease if interest rates increase by 1%.