Question

Consider the following three bonds:

Bond	Price	Coupon Rate	Time-to-Maturity
A	96.000	8%	6 years
B	98.000	9%	8 years
C	105.000	9%	6 years

Which bond will most likely experience the smallest percentage change in price if the market discount rate for all three bonds increases by 100 basis points? Explain your logic in 2-4 sentences. Show Calculations and Formulas of how you arrived to this answer.

Answer 1

Conclusion - Out of all the three bonds, Bond C will have the smallest change in the Price which is -4.36%.

The reason of decrease in the bond value is becasue of the inverse relationship between Bond price and Market intrest rate. As and when the market intrest goes up, the Bond price will go dow and vice versa. This happend becasue when the market intrest rate goes up then the existing bonds will have to fare agaist the new bonds with higher coupon rate which induces the existing bond price to all.