Assume that bond ABC and XYZ have the same maturity and the coupon rate of one...

Assume that bond ABC and XYZ have the same maturity and the coupon rate of one bond is 5% and the second 13%. The yield curve for this issuer is flat at 8%. Based on this information, which bond is the lower coupon bond and which is the higher coupon bond?

	Estimated percentage change in price if interest rates change by:
	-50 basis points	+50 basis points
Bond ABC	+12%	-9%
Bond XYZ	+11%	-8%

A. ABC is the higher coupon bond, XYZ is the lower coupon bond

B. ABC is the lower coupon bond, XYZ is the higher coupon bond

C. There is not enough information to tell

Expert Solution

If both bonds are of equal maturity then lower coupon bond will have more sensiitivity towards change in interest rate.

As we can see in the table, Bond ABC is more sensitive than Bond XYZ. So Bond ABC is a lower coupon bond and Bond XYZ is a higher coupon bond.

Answer : B. ABC is the lower coupon bond, XYZ is the higher coupon bond

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jeff jeffy answered 1 year ago

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