Question
Two bonds have exactly the same duration, same yield-to-maturity and same price. Bond 2 has a much more curved price-yield relationship, i.e., when the yield
Two bonds have exactly the same duration, same yield-to-maturity and same price. Bond 2 has a much more curved price-yield relationship, i.e., when the yield changes, the slope of the price-yield curve will change more for bond 2. Assume that the market interest rate and thus the yield-to-maturity of both bonds increase by 1%. Which statement below regarding the price changes of two bonds is correct, if convexity is taken into account? Select one:
A. Both bond prices will decrease, and bond 2s price will decrease less than bond 1.
B. Both bond prices will change by the same amount.
C. Both bond prices will decrease, and bond 2s price will decrease more than bond 1.
D. Both bond prices will increase, and bond 2s price will increase less than bond 1. E. Both bond prices will increase, and bond 2s price will increase more than bond 1.
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