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

We can tell by inspection that b, c, d, and e are all incorrect. That leaves answer a as the only possibly correct statement. Recognize that longer-term bonds, and ones where payments come late (like low coupon bonds) are most sensitive to changes in interest rates. Thus, the 10-year, 8% coupon bond should be more sensitive to a decline in rates. You could also do some calculations to confirm that a is correct.

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