A company has two outstanding bonds with the same features,apart from their coupon.Bond A has a coupon of 5%,while bond B has a coupon of 8%.If the market interest rate changes by 10%:
A) bond A will have the greater change in price.
B) bond B will have the greater change in price.
C) the price of the bonds will not alter.
D) the price of the bonds will change by the same amount.

Question

Quizplus · Accepted Answer

Bond A, with a lower coupon rate, is more sensitive to changes in market interest rates. When the market interest rate increases by 10%, the fixed coupon payment of 5% becomes less attractive for investors, resulting in a decrease in the price of Bond A. On the other hand, bond B with a higher coupon rate of 8% will not be affected as much by the increase in market interest rates since its coupon payment is relatively more attractive. Therefore, Bond A will have a greater change in price compared to Bond B.

A Company Has Two Outstanding Bonds with the Same Features,apart