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10. The prices of high-coupon bonds tend to be less sensitive to a given Change in...

10. The prices of high-coupon bonds tend to be less sensitive to a given Change in interest rates than low-coupon bonds, other things held constant. (Chapter 7)(8 points) a. True b. False

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Answer #1

ANSWER -

TRUE

Technically speaking, because the lower coupon bond's duration is higher than that of a higher coupon bond.
Less technically, the price of the bonds is the present value of all its cash flows (coupon and principal) discounted at the prevailing yields. The sensitivity of a bond price to yield hence is a function of how the future cash flows are structured - for lower coupon rate, the relative weight of coupon in total cash flows is lower in comparison to that of principal repayment.
In fact, the weighted average tenor of the bond (weighted by the present value of the future cash flows) summarizes the effects of coupon and principal related cash flows on the sensitivity of bond price to yields - and is called 'duration' of that bond.

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