The table illustrates a number of general points in relation to a bond’s reaction to a change in interest rates/yields.

Question

BlackTom AI · Accepted Answer

To tackle this question, we first restate what the table conveys about price sensitivity to changes in yields across term and coupon structures.

Option 1: 'The price of longer term bonds is more sensitive to changes in yields than the prices of shorter maturity bonds.' This aligns with the standard concept of duration: longer maturities generally exhibit greater percentage price movement for a given yield shift because cash flows are spread further in time and are discounted more heavily when yields rise. The table shows bonds with a longer term (e.g., 10 years) typically having larger relative price changes than shorter-term bonds (e.g., 2 years) when yields change, supporting the idea that longer terms are more price-sensitive.

Option 2: 'The prices of low coupon bonds are more sensitive to a given change in market yields than the prices of high coupon bonds.' Lower coupon bonds have a larger portion of their value coming from the principal repayment at maturity, which is discounted more heavily when yields move, thereby producing larger percentage price moves for a given yield change. Conversely, high coupon bonds return more of their value earlier via coupons, making them less price-sensitive to small yield shifts. The table data and standard duration theory both point toward greater sensitivity for low coupon versus high coupon bonds, so this statement is consistent with expected behavior.

Option 3: 'Bonds with higher coupons have lower prices.' This is generally incorrect. For a given maturity and yield environment, higher coupon bonds tend to have higher prices because they provide larger cash flows earlier, increasing present value. Only in extreme scenarios (e.g., deeply negative convexity or tax effects) might deviations occur, but as a broad rule in standard fixed-income theory, higher coupons correspond to higher prices.

Option 4: 'The longer the term of a bond the greater is its price.' This wording is unclear and misleading. While longer-term bonds typically exhibit greater price volatility (i.e., a larger percentage price change for a given yield change) due to higher duration, saying 'the greater is its price' implies a monotonic or unconditional increase in price with term, which is false. Price is not determined to be higher solely by longer term; it depends on yield, coupon, and other factors. In practice, longer-term bonds can have lower or higher prices depending on these conditions, so this blanket statement is incorrect.

In summary, the two correct points reflect established ideas: (a) longer maturities amplify price sensitivity to yield changes, and (b) lower coupon bonds exhibit greater price sensitivity than higher coupon bonds for a given yield movement. The remaining options contradict standard bond pricing intuition as described above.

25728 Fixed Income Analysis - Autumn 2025 FIA Quiz 5.1 Bond Duration

The table illustrates a number of general points in relation to a bond’s reaction to a change in interest rates/yields.

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