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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Fixed Income Securities (NISM XXI-A)

Bond A and Bond B have the same maturity and credit rating. Bond A has a coupon of 6% and Bond B has a coupon of 10%. If market yields rise by 1% for both, which statement is most likely correct?

Bond A, the 6% coupon bond, will fall more in percentage terms. With the same maturity, the lower coupon gives it a longer duration, so its price is more sensitive to a rise in market yields than the 10% coupon bond.

  1. ABond A will fall more in percentage price terms because it has a longer durationCorrect
  2. BBond B will fall more in percentage price terms because it pays higher coupons
  3. CBoth will rise in price as coupons are fixed
  4. DBoth will fall by exactly the same percentage

Explanation

For the same maturity, a lower-coupon bond has a higher duration because less of its value comes from early cash flows. A higher duration means greater price sensitivity to yield changes, so Bond A falls more in percentage terms. Bond B's higher coupons shorten its duration.

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