For a given change in interest rates, a bond's price change is _____ related to the bond's coupon rate.

Question

Quizplus · Accepted Answer

The price change of a bond is inversely related to the bond's coupon rate. This means that as interest rates increase, the price of a bond with a higher coupon rate will decrease more than the price of a bond with a lower coupon rate, because the higher coupon rate bond is paying out more interest compared to the newly issued bonds at higher rates. On the other hand, a lower coupon rate bond will have a smaller decrease in price because its coupon payments are closer in line with the newly issued bonds at higher rates. Therefore, the coupon rate is an important factor to consider when analyzing bond price fluctuations caused by interest rate changes.

For a Given Change in Interest Rates, a Bond's Price