Question

Bond J has a coupon rate of 6 percent and Bond K has a coupon rate of 12 percent. Both bonds have 20 years to maturity, make semiannual payments, and have a YTM of 9 percent. If interest rates remain unchanged, which bond will have a greater percentage price change if the YTM increases by 1 percent?

1) Bond J
2) Bond K

Answer 1

When interest rates increase, the price of existing bonds decreases. Bond K, with a higher coupon rate of 12 percent, will have a greater percentage price change if the YTM increases by 1 percent compared to Bond J with a coupon rate of 6 percent.

Step-by-step explanation:

When interest rates increase, the price of existing bonds decreases. Bond prices are inversely related to interest rates. The percentage price change of a bond depends on its duration, which is a measure of the bond's sensitivity to interest rate changes. Bond K, with a higher coupon rate of 12 percent, will have a greater percentage price change if the YTM increases by 1 percent compared to Bond J with a coupon rate of 6 percent.