- The greater the coupon rate of the bond, the lower will be ts bond price volatility (T/F - and why? - i don’t see the relationship…) 2. The longer the bond’s maturity, the more volatile will be its price (T/F - and why?) Thanks!
kurmanal Wrote: ------------------------------------------------------- > 1. The greater the coupon rate of the bond, the > lower will be ts bond price volatility (T/F - and > why? - i don’t see the relationship…) > This is duration 101. You should check your level I book. high coupon --> more weight upfront --> lower duration > 2. The longer the bond’s maturity, the more > volatile will be its price (T/F - and why?) > Longer maturity -> higher duration. > Thanks!
Take the extreme example of a 30Y zero coupon bond yielding 4%. 1. You aren’t getting any cash flows for 30 Years so if you lock in a yield and rates move against you (up) there won’t be any cash flows to reinvest at the prevailing (higher) rates. So the higher the coupon the more you’ll have available for reinvestment at the higher rate. 2. Again say you locked in your 4% yield and yields jump to 10%. You’re stuck for 30Y so the price will fall off a cliff. Now say your bond is yielding 4% and yields jump to 10, but your bond matures tomorrow. The price won’t do much at all because you get terminal cf in 1 day.
Thanks for the response, elfca, I totally blanked on this question… I now remember this after your explanation =)