An 8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% 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?
A) Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.
B) The prices of both bonds would increase by the same amount.
C) One bond's price would increase, while the other bond's price would decrease.
D) The prices of the two bonds would remain constant.
E) The prices of both bonds will decrease by the same amount.

Question

Quizplus · Accepted Answer

As interest rates rise, bond prices fall. Since both bonds have the same yield to maturity, if interest rates rise, both bonds would decline in price. However, the bond with the lower coupon rate (in this case, the 10-year bond with an 8% coupon) would have a greater percentage decline in price than the bond with the higher coupon rate (the 8-year bond with a 10% coupon). This is because the lower-coupon bond has a longer duration and is therefore more sensitive to changes in interest rates.

An 8-Year Treasury Bond Has a 10% Coupon, and a 10-Year