CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields
Two bonds have the same maturity and the same yield to maturity, but Bond X has a lower coupon rate than Bond Y. If yields on both fall by 50 basis points, the percentage price increase is most likely:
The percentage price increase is larger for Bond X. With the same maturity and yield, a lower coupon puts more of the value in the final principal payment, which raises interest rate sensitivity relative to the higher coupon bond.
- Aequal for both bonds
- Blarger for Bond XCorrect
- Clarger for Bond Y
Explanation
For the same maturity and yield, a lower coupon bond has more of its value in the distant principal payment, giving longer duration and greater convexity. Its percentage price change for a given yield change is therefore larger. Bond Y's higher coupons shorten its effective cash-flow timing.
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