Assume that bond ABC and XYZ have the same maturity and the coupon rate of one bond is 5% and the second 13%. The yield curve for this issuer is flat at 8%. Based on this information, which bond is the lower coupon bond and which is the higher coupon bond. What is the best terminology to describe this pattern (use terminology covered in this unit)? Please explain your answers.

[3 Marks]

Estimated percentage change in price if interest rates change by:

-50 basis points

+50 basis points

Bond ABC

+10%

-7%

Bond XYZ

+11%

-8%

Question

Assume that bond ABC and XYZ have the same maturity and the coupon rate of one bond is 5% and the second 13%. The yield curve for this issuer is flat at 8%. Based on this information, which bond is the lower coupon bond and which is the higher coupon bond. What is the best terminology to describe this pattern (use terminology covered in this unit)? Please explain your answers.

[3 Marks]

	Estimated percentage change in price if interest rates change by:
	-50 basis points	+50 basis points
Bond ABC	+10%	-7%
Bond XYZ	+11%	-8%

Accepted Answer

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