Company has issued two series of bonds A and B. They have the following characteristics: Bond A Bond B Face Value ₹ 100 ₹ 100 Coupon Rate 14% 14% Current market price ₹ 100 ₹ 100 Term to maturity 4 years 7 years Coupon P

CS Professional · Banking - Law & Practice · PYQS · December 2019
Company has issued two series of bonds A and B. They have the following characteristics: Bond A Bond B Face Value ₹ 100 ₹ 100 Coupon Rate 14% 14% Current market price ₹ 100 ₹ 100 Term to maturity 4 years 7 years Coupon Payment Annually Annually What is the percentage change in the price of two bonds? What did you notice regarding the percentage price change in case of Bonds A and B identical in all respects, except term to maturity?

Answer & Explanation:

Percentage price change in case of Bond A is = (102.943 - 100) / 100 = 2.943% Percentage price change in case of Bond B is = (104.4164 - 100) / 100 = 4.4164% We observe that for a decrease in YTM by 1% the bond having longer term to maturity experience a price change that is more than the price change for a bond that is having a shorter term to maturity.

Topics: Financial Markets and Instruments

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