Question

Bond A is a 12 year bond. Bond B is a 10 year bond. Both bonds have the same yield and same duration. Which of the following is true.

a/ Bond A has a lower coupon

b/ Bonds A and B have equal convexity

c/ Bond A has lower convexity

d/ None of the above

Answer 1

Bond A is a 12 year bond.

Bond B is a 10 year bond.

Both bonds have the same yield and

and Both bonds have the same duration.

Higher the tenure of bond, higher the duration

Higher the coupon of bond, lower the duration.

Since the yield of both the bonds is same, for having same duration, bond with higher tenure should have higher coupon rate.

Therefore coupon of bond A must be higher than coupon of bond B

Higher the coupon rate, the lower a bond's convexity. Therefore bond A should have lower convexity compared to Bond B

a/ Bond A has a lower coupon - FALSE.

b/ Bonds A and B have equal convexity. FALSE

c/ Bond A has lower convexity. TRUE

d/ None of the above

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