medium · Principles of Finance valuation
Compare Bond A (10-year, 8% coupon) and Bond B (10-year, 2% coupon), both currently yielding 5%.
If interest rates increase by 100 basis points, which bond will experience the larger percentage price decrease, and why?
- Bond B, because bonds carrying lower coupons exhibit lower convexity, making them far more vulnerable to sudden rate spikes.
- Bond B, because lower-coupon bonds have a higher proportion of their present value in the distant principal payment, increasing duration.
- Both bonds will experience an identical percentage decrease, since they share the same maturity and identical starting yield of 5%.
- Bond A, because its larger coupon payments make its price more sensitive to the discount rate applied in the earliest years of the bond's life.
Sign up free to see the explanation and track your rank →
More Principles of Finance valuation practice
- What is its current market price?
- What is its Modified Duration?
- A 10-year corporate bond with a face value of $1,000 pays an annual coupon of 6%. If the c
- If the market yield to maturity (YTM) suddenly increases to 5.5%, what will happen to the
- If the stock price is 35 at expiration, what is the net profit?
- If the current market interest rate for similar bonds is 6%, how will the bond be priced i
- What is the current market price of the bond?
- A 5-year zero-coupon bond with a face value of 1,000 is curr… — What is the yield to matur