Evaluate this statement: "If the yield of two bonds having equal maturity changes the same amount, the price of the lower coupon bond will change more than the price of the higher coupon bond." (True, false, or maybe?) Explain your answer.

Question

Business

Harper Mcbride

7 July, 04:50

Evaluate this statement: "If the yield of two bonds having equal maturity changes the same amount, the price of the lower coupon bond will change more than the price of the higher coupon bond." (True, false, or maybe?) Explain your answer.

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Answers (1)

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Corinne Floyd · Answer 1

FALSE

Explanation:

As the lower coupon means there is less amount of cash subject to variation of interest rate.

We must understand that in the end of the life of a bond (maturity), the value should always match the face value thus, the difference in bond market price arise from coupon payment.

If a bonds coupon payment is 40 dollars while another bond coupon payment is 80 dollars the present value of the second will be more influenced from the interest rate as there are more dollars in the future to discount.