A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10%
ID: 2729386 • Letter: A
Question
A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be correct? A The prices of both bonds will decrease by the same amount B Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price C The prices of both bonds would increase by the same amount D One bond's price would increase, while the other bond’s price would decrease E The prices of the two bonds would remain constant
Explanation / Answer
Answer is Option B i.e Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.
Recognize that longer-term bonds, and ones where payments come late (like low coupon bonds) are most sensitive to changes in interest rates. Thus, the 10-year, 8% coupon bond should be more sensitive to a decline in rates.
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