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CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields

Two option-free bonds have the same maturity and yield-to-maturity. Bond X has a 2% coupon and Bond Y has a 6% coupon. Compared with Bond Y, Bond X most likely has:

Bond X, with the lower coupon, most likely has higher price volatility and more convexity. Its cash flows are concentrated in the final principal payment, which lengthens its effective timing and increases sensitivity to yield changes, even though both bonds share the same maturity and yield.

  1. Alower price volatility for a given yield change and less convexity.
  2. Bthe same price volatility because maturities are equal.
  3. Chigher price volatility for a given yield change and more convexity.Correct

Explanation

For the same maturity and yield, a lower coupon means cash flows are weighted toward the distant principal, raising duration and convexity. So the 2% bond is more sensitive to yield changes and has greater convexity. Equal maturity does not imply equal sensitivity.

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