Assume that a noncallable 10-year T-bond has a 12% annual coupon,while a 15-year noncallable T-bond has an 8% annual coupon.Assume also that the yield curve is flat,and all Treasury securities have a 10% yield to maturity.Which of the following statements is CORRECT?

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Quizplus · Accepted Answer

We can tell by inspection that c,d,and e are all incorrect.That leaves answers a and b as the only possibly correct statements.Also,recognize that longer-term bonds,and also bonds whose payments come late (like low coupon bonds)are most sensitive to changes in interest rates.Thus,the 15-year,8% coupon bond would be more sensitive to a decline in rates.Finally,we can do some calculations to confirm that a is the correct answer:
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Assume That a Noncallable 10-Year T-Bond Has a 12% Annual