Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond has an 8% annual coupon.Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity.Which of the following statements is CORRECT?

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Quizplus · Accepted Answer

We can tell by inspection that b, c, and d are all incorrectrue.That leaves answers a and e as the only possibly correct statements.Also, 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 15-year, 8% coupon bond should be more sensitive to a decline in rates.Finally, we can do some calculations to confirm that e is the correct answer:
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Assume That a 10-Year Treasury Bond Has a 12% Annual