Question

Which bond will most likely experience the greatest percentage change in price if the market discount rates for all three bonds increase by 100 basis points?

1. Bond A
2. Bond B
3. Bond C

The following information relates to Questions 17-19

Bond	Coupon Rate	Time-to-Maturity		Time-to-Maturity	Spot Rates
X	8%	3 years		1 year	8%
Y	7%	3 years		2 years	9%
Z	6%	3 years		3 years	10%

All three bonds pay interest annually.

Answer 1

Answer ) Bond C)

Bond C will experience the greatest percentage change in price if the market discount rate of the bond increases by 100 basis points. This is because this bond has the longest time to maturity remaining.

Longest time to maturity depicts that this bond will have the highest duration out of the 3 bonds and hence will be the most sensitive to interest rate changes.

Bond A and Bond B will have relativelly lesser change in price as compared to change in interest rate due to lesser time remaining till maturity.

Working Calculation for reference

Using PV Formula in excel, we get PV =

Time to Maturity	1	2	3
Rate	8%	9%	10%
PMT	80	70	60
FV	1000	1000	1000
PV	-1000	-964.818	-900.526

If we increase the interest rates by 100 bps

Time to Maturity	1	2	3
Rate	9%	10%	11%
PMT	80	70	60
FV	1000	1000	1000
PV	-990.82569	-947.934	-877.814

We can clearly see that the price of Bond C changes more as compared to Bond A and Bond B due to its longer time to maturity.