Question

Which of the following statements is CORRECT?

Answer 1

Answer: c. If their maturities and other characteristics were the same, a 5% coupon bond would have more price risk than a 10% coupon bond.

Explanation:

Price risk of a bond is the risk that the bond changes price or rather the degree of price volatility. Bond prices change in reaction to market interest rates with higher rates meaning lower prices and lower rates meaning higher prices.

When the market interest rates rise above the Coupon on a bond, the bond price will fall below par and when the interest rates are below the coupon, the bond will be above par.

A 5% coupon bond will be more prone to changes in prices because market interest rates are generally low and fluctuate below 10% which means that they will affect the 5% bond more than the 10% because there are better chances of rates rising above or falling below 5% than there are of 10%.