Fixed Income

Someone please explain the solution. thanks Question: Two annual bonds, one with a coupon rate of 12% and another with a coupon rate of 10% have a YTM of 15%. The YTM is decreased by 2% for both the bonds. Which of the following is most likely the change due to change in YTM? Choose one answer. a. The change in price of 10% bond will be more than that of 12% bond. Correct b. The change in price of both the bonds will be same. Incorrect c. The change in price of 10% bonds will be less than that of 12% bond

Higher coupon rate --> lower duration because more bond value from payments, you receive them sooner.

That’s why the one with lower coupon rate has higher risk, therefore it will change in price more than the bond with higher coupon rate.

I wrote an article on duration that may be of some help here: http://financialexamhelp123.com/macaulay-duration-modified-duration-and-effective-duration/

The short answer is that the higher the coupon rate, the shorter the modified duration. Thus, the 12% coupon bond will have a shorter modified duration than the 10% coupon bond, so its (percentage) price change will be less.

Note that I specified that the percentage price change will be less. Whether the dollar price change is less or the same or more depends on the market prices of the two bonds. The question is poorly worded in that it isn’t clear whether the author meant the percentage price change or the dollar price change. Unfortunately, lots of practice questions are similarly poorly written.

I hate questions like these, and am annoyed that CFA review providers put up with this sort of sloppiness.