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Zorluk: OrtaDebt Securities and Bond Structure

An institutional investor is evaluating two investment-grade corporate bonds with identical 10-year maturities. Bond X carries an annual coupon rate of 3%, while Bond Y carries an annual coupon rate of 8%. If prevailing market interest rates increase across all maturities, which of the following best describes the relative market price movement of these two bonds?

  1. Both bonds will decrease in price, with Bond X experiencing a greater percentage price decline than Bond Y.Cevap
  2. B
    Both bonds will decrease in price, with Bond Y experiencing a greater percentage price decline than Bond X.
  3. C
    Bond X will decline in market price while Bond Y will increase in market price to reflect its higher income output.
  4. D
    Both bonds will increase in market price, but Bond X will appreciate at a faster rate due to its lower initial price.

Cevap

Both bonds will decrease in price, with Bond X experiencing a greater percentage price decline than Bond Y.
Bond prices move inversely to interest rates. Furthermore, interest rate volatility (duration risk) is inversely related to coupon rates. Because Bond X has a lower coupon rate (3%) than Bond Y (8%), its cash flows are weighted more heavily toward maturity. Consequently, Bond X exhibits greater price sensitivity and will experience a larger percentage decline in market value.

Adım Adım Çözüm

1
Apply the fundamental inverse relationship between market interest rates and bond prices.
Since market interest rates increased, the market prices of both Bond X and Bond Y must decrease.
Existing bonds paying fixed coupons become less attractive when newly issued bonds offer higher prevailing rates.
2
Evaluate the interest rate risk (duration) of both bonds based on their coupon rates.
Bond X has a lower coupon rate (3%) compared to Bond Y (8%), giving Bond X a higher duration.
Bonds paying lower coupons return a smaller portion of their total cash flow in early years, making their overall present value more sensitive to interest rate fluctuations.
3
Compare the percentage price sensitivity of both bonds.
Bond X will experience a sharper percentage drop in market price than Bond Y.
Higher coupon bonds (Bond Y) provide larger early cash flows that buffer against price declines during rate hikes.

Anahtar Kavram

Interest Rate Sensitivity and Duration Relationship to Coupon Rates
Tahmini Süre:1m 15s
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Konular

Debt Securities and Bond Structure

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