Say, interest rates rise by 1%: All else remains the same. 1) Price of an 8%-coupon bond will decrease more than price of a 10% bond, true or false? 2) Price of 30-year bond will decrease more than the price of a 5-year note, true or false? 3) Price of bond with YTM=10% will decrease more than the price of a bond with YTM=8%, true or false? Enjoy the mind juggling exercise.

- true, lower coupon = higher duration 2) true, higher maturity = higher duration 3) false, lower YTM = higher duration

T T F

1- correct, lower coupon = more price sensitivity 2- correct, longer maturity = more price sensitivity 3) incorrect, higher interest rate = lower duration

T T F as well this is all about convexity and duration principles. bonus: reinvestment risk – higher or lower with a low coupon bond?

TTF

> bonus: reinvestment risk – higher or lower with a > low coupon bond? lower

daj224 Wrote: > bonus: reinvestment risk – higher or lower with a > low coupon bond? lower

Reinvestment risk basically an inverse to interest rate risk. high coupons are bad… I find always benchmarking on the zero-coupon bond is helpful with these questions. No reinvesting in zero-coupon bond… therefore, low coupon, low investment risk.

Congrats, you’re all well prepared.

I have found that duration is probably the biggest part of fixed income. I have spent quite a bit of time making sure that I have it down very well. In my opinion, if you can understand duration, the rest of the fixed income material comes together pretty easily as it is based on mostly the same concepts.

rlange Wrote: ------------------------------------------------------- > I have found that duration is probably the biggest > part of fixed income. I have spent quite a bit of > time making sure that I have it down very well. In > my opinion, if you can understand duration, the > rest of the fixed income material comes together > pretty easily as it is based on mostly the same > concepts. yeah, that is true. i worry more about that than i do things like GO bonds, etc. duration, convexity, boostrapping, forwards, those are the biggies.

Dreary Wrote: ------------------------------------------------------- > Say, interest rates rise by 1%: All else remains > the same. > > 1) Price of an 8%-coupon bond will decrease more > than price of a 10% bond, true or false? > > 2) Price of 30-year bond will decrease more than > the price of a 5-year note, true or false? > > 3) Price of bond with YTM=10% will decrease more > than the price of a bond with YTM=8%, true or > false? > > Enjoy the mind juggling exercise. Been a while doing this, but I’ll take my guesses. 1) Higher coupon bonds have low interest rate volatility. ie. TRUE 2) The longer the maturity, the greater the interest rate volatility: TRUE 3) This one has me stumped, but I’d guess … um false… cuz higher YTM would trade at a higher price, ie, interest rate movements are greater at a lower price. so YTM 8% would have high interest rate volatility.

Think about convexity, since there was no call option mentioned, it would have positive convexity. Thus, at lower yields, it is more sensitive to interest rate changes since payments are deferred to a later period (like zero-coupon bonds). If it is hard to visualize, think of the downward sloping Price - Yield chart. It curves because of the convexity.

rlange Wrote: ------------------------------------------------------- > Think about convexity, since there was no call > option mentioned, it would have positive > convexity. Thus, at lower yields, it is more > sensitive to interest rate changes since payments > are deferred to a later period (like zero-coupon > bonds). > > If it is hard to visualize, think of the downward > sloping Price - Yield chart. It curves because of > the convexity. I thought for a convex curve, the price increases more than the price decreases, due to a change in interest rates.