Consider a bond portfolio manager who expects interest rates to decline and must choose between the following two bonds. Bond A: 10 years to maturity, 5 percent coupon, 5 percent yield to maturity
Bond B: 10 years to maturity, 3 percent coupon, 4 percent yield to maturity
A) Bond A because it has a higher coupon rate
B) Bond A because it has a higher yield to maturity
C) Bond B because it has a lower coupon rate
D) Bond A or Bond B because the maturities are the same
E) None of these are correct.

Question

Quizplus · Accepted Answer

Bond B has a lower coupon rate, which generally means it has a higher duration than Bond A, making it more sensitive to interest rate changes. Therefore, if interest rates decline, Bond B is likely to increase more in price than Bond A.

Consider a Bond Portfolio Manager Who Expects Interest Rates to Decline