Skip to content

FRM Part I · FRM Exam Part I · Applying Duration, Convexity, and DV01

Two bonds have the same maturity and the same yield of 5%. Bond X has a 2% coupon and Bond Y has a 7% coupon. Both pay annual coupons. For a small identical decline in yield, which statement is most accurate?

Bond X, the 2% coupon bond, gains more in percentage terms. With the same maturity and yield, a lower coupon pushes cash flows later, raising duration and therefore price sensitivity to yield changes.

  1. ABond X has a larger percentage price increase because its duration is higherCorrect
  2. BBond Y has a larger percentage price increase because its coupon is higher
  3. CBoth have the same percentage price change because maturity and yield are equal
  4. DBond X has a smaller percentage price increase because it trades at a discount

Explanation

For equal maturity and yield, a lower coupon means more of the value is received late, so Macaulay and modified duration are higher. Bond X therefore has greater percentage price sensitivity. Equal maturity does not imply equal duration unless both are zero-coupon.

Did you get it right without looking?

One question tells you little. A timed set on Applying Duration, Convexity, and DV01 shows your real accuracy, how long you take and where you lose marks.

Practise Applying Duration, Convexity, and DV01Free diagnostic mock

More Applying Duration, Convexity, and DV01 questions