Question

Bond A is similar to Bond B in all aspects, except that Bond B has a higher coupon rate than Bond A.

If the yield on both bonds increases by 1%, you expect that

Select one:

a. Bond B will depreciate in price less than Bond A in percentage terms.

b. Bond B will appreciate in price less than Bond A in percentage terms.

c. Bond B will depreciate in price more than Bond A in percentage terms.

d. Bond B will appreciate in price more than Bond A in percentage terms.

Answer 1

ANSWER : c : BOND B WILL DEPRECIATE IN PRICE MORE THAN BOND A IN PERCENTAGE TERMS

HIGHER COUPON RATE BOND WILL DEPRECIATE LESS.IN % TERMS & WILL DEPRECIATE MORE IN PRICE TERMS

FOR A GIVEN YTM, IT IS VERY CLEAR THAT THE HIGHER COUPON RATE WILL HAVE HIGHER VALUE. AS YTM INCREASE, HIGHER COUPON RATE WILL BE DISCOUNTED MORE. SO PRICE WILL DECLINE BUT IN % TERMS LESS AS COUPON RATE IS HIGHER.

HIGHER COUPON RATE BOND HAS HIGHER BASE AS IT HAS HIGHER PRICE. SO % WISE, THE DECREASE WILL BE LOWER. (THUMBS UP PLEASE)