# Reading 52 LOb Exceptional case of Maturity effect when coupon rate < market discount rate

Example 3 Q1 From Curriculum SS15 Reading 52: Introduction to Fixed Income Valuation , LO (b) - maturity effect ( exceptional case):

Here coupon rate of 0% for both bond A and B, A has maturity of 2 year , but B has 4 years. YTM was 5% for both and will change to 4.9%. Considering Maturity effect which one will be selected ?

It is said in the curriculum than except of maturity effect will not work here. But, both has coupon rate of 0%  who it could be more than market discount rate?   Here, is YTM is the market discount rate in this case ? It is explained  in explanation that no exception to the maturity effect , as no bond are trading at a discount.

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On p. 409 of volume 5 of the 2018 curriculum we read, “Exceptions to the maturity effect are rare in practice.  They occur only for low-coupon (but not zero-coupon) , long-term bonds trading at a discount.”  (Emphasis added.)

There is no exception to the maturity effect for zero-coupon bonds.

You should calculate the percentage price change for the two bonds given; that, better than anything else, will demonstrate that the 4-year bond’s price will rise more than the two-year bond’s price.

Simplify the complicated side; don't complify the simplicated side.

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Thank you.

My pleasure.

Simplify the complicated side; don't complify the simplicated side.

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http://financialexamhelp123.com/