Question

Price volatility is the greatest for which one of the following bonds A. 8% coupon rate...

Price volatility is the greatest for which one of the following bonds

A. 8% coupon rate and 10 years to maturity

B. 4% coupon rate and 20 years to maturity

C. 8% coupon rate and 20 years to maturity

D. 4% coupon rate and 10 years to maturity

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Answer #1

Answer: Option B. 4% coupon rate and 20 years to maturity

Volatility of the bond is indicated by duration of the bond. Higher the duration, higher is the volatility of the bond price. Now, duration of bond is directly related to number of years to maturity and inversely related to coupon rate of the bond. In this case, bond in option B, coupon rate is lowest and number of years to maturity highest. So, duration of bond in option b is highest and hence most volatile.

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