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CFA Level I · CFA Level I Exam · Interest Rate Risk and Return

Two option-free bonds have the same maturity and the same yield to maturity, but Bond X has a 3% coupon and Bond Y has a 7% coupon. For a given decrease in yield, the percentage price increase is most likely:

The percentage price increase is greater for Bond X, the lower-coupon bond. Its cash flows are weighted more toward the final principal payment, which is further in time, so its present value reacts more strongly to a change in yield than the higher-coupon bond.

  1. Agreater for Bond XCorrect
  2. Bequal for both bonds
  3. Cgreater for Bond Y

Explanation

With maturity and yield held equal, a lower coupon means more of the bond's value comes from the distant principal payment, which is more sensitive to discount rate changes. Bond X therefore has higher duration and a larger percentage price change. Equal sensitivity would require equal cash flow timing, which is not the case here.

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