1. 10% coupon bond with 15 years to maturity
  2. 5% coupon bond with 15 years to maturity
  3. 10% coupon bond with 20 years to maturity
  4. 5% coupon bond with 20 years to maturity
  • 3
    This looks like homework. show your work before we help you with it. – JohnFx Apr 25 '18 at 18:46
  • I'm really sorry I don't have any, this is my old test question, and I try to figure out which answer is correct. I haven't calculated anything, but I think the right answer is 4. based on my readings, but I'm not sure – Sanderi Apr 25 '18 at 18:49
  • 1
    "Based on my readings" - explain why you think this, and it will help to explain the answer. Otherwise an answer here is no different from just looking online at a cheat sheet. – Grade 'Eh' Bacon Apr 25 '18 at 20:18

It's important to understand this as an investor.

There is a metric called "duration". It's the time weighted average of all the coupons and final payment you'd receive over the life of the bond. Logically, a zero coupon bond has the longest duration (equal to its maturity) vs one with coupons, given equal maturities. And the price impact is the change in rate times duration, at the margin. e.g. a 10 year zero will drop about 1% in price for a .1% rise in rate.

So we kill (1) and (2), and go for the 20 year. The higher coupon has a shorter duration, as we get more money back sooner. Therefore it's the 5%, number (4).

  • 1
    Thank you very much, I haven't figured out this until now. Thank you so much – Sanderi Apr 25 '18 at 19:04

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