Question

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Neither is callable, and both 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. The prices of both bonds will decrease by the same amount.
b. Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.
c. The prices of both bonds would increase by the same amount. d. One bond's price would increase, while the other bond’s price would decrease.
e. The prices of the two bonds would remain constant.

Answer 1

B) Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.

Step-by-step explanation:

Since the 10-year bond has longer-maturity, the prices of both bonds cannot either increase or decrease. Therefore, answer choice A and C cannot be the answers. Again, as both the bonds YTM increases by the same amount, one bond's price cannot affect the other bond's price. So, answer choice D is incorrect. As we know that longer-term and lower coupon rate bond has the sensitivity issue that the interest rate might increase, 10-year bond's price will decline more. Therefore, B is the correct option.