8 All other things being equal which one of the following bo

8. All other things being equal, which one of the following bonds has the greatest price volatility?
a. 10-year, 12% coupon
b. 10-year, 10% coupon
c. 5-year, 10% coupon
d. There is not enough information.

Solution

Correct answer is > b. 10-year, 10% coupon

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The bond with longer maturity and lowest coupon will exhibit greater price volatility. The lower coupon responds more to yield or changing interest rate. Keeping coupon as base, the proportionate change in yield is higher for lower coupon bonds. Term of the bond matters a lot for a bond price, longer the maturity higher the price volatility because bond principal will get discounted for more terms if the maturity is longer.