A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Question

Quizplus · Accepted Answer

The price of a bond and its yield are inversely related. As the yield to maturity increases, the price of the bond decreases. Since both bonds have the same yield to maturity, an increase in yield will result in a decrease in price for both bonds.

However, the bond with the lower coupon rate (8-year bond with 10% coupon) will experience a greater percentage decline in price compared to the bond with the higher coupon rate (10-year bond with 8% coupon). This is because the higher coupon rate provides more cash flows to the bondholder, and thus, the bond's price is less sensitive to changes in interest rates.

Therefore, choice B is correct - both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.

A 10-Year Treasury Bond Has an 8% Coupon, and an 8-Year