Consider a bond portfolio manager who expects interest rates to decline and has to choose between the following two bonds.
Bond A: 10 years to maturity,5% coupon,5% yield to maturity
Bond B: 10 years to maturity,3% coupon,4% yield to maturity
A) Bond A because it has a higher coupon rate.
B) Bond A because it has a higher yield to maturity.
C) Bond B because it has a lower coupon rate.
D) Bond A or Bond B because the maturities are the same.
E) None of the above.

Question

Quizplus · Accepted Answer

When interest rates decline, bonds with lower coupon rates generally have higher price sensitivity and thus greater potential for price appreciation.

Consider a Bond Portfolio Manager Who Expects Interest Rates to Decline