Question

1. please explain the impact of coupon amounts (say $30 coupon vs. $$85 coupon) on the interest rate sensitivity of a bond. In other words, if the market interest rate changes, which bond's price will change more, the one with the low or high coupon? (assuming other things are identical.) Briefly explain why?

2. what is the relationship between the time to maturity and interest rate sensitivity of bonds, other things held constant?

Answer 1

1

Coupon on bond and interest rate sensitivity of bonds are inversely related to each other. All other things remain constant bonds with higher coupon are lower affected by interest rate change while bonds with lower coupons are more affected with interest rate change.

2

Time to maturity and interest rate sensitivity of bonds are directly related to each other. All other things remain constant bonds with higher maturity are more affected by interest rate change while bonds with lower maturity are less affected with interest rate change.

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