A Registered Representative is comparing two bonds with 15 years to maturity and identical market yields. Bond A has a 2% coupon and Bond B has a 6% coupon. Which statement regarding their interest rate sensitivity is correct?
6 attempts · 16.7% correct
Both bonds will have the same modified duration because they have identical maturities and market yields.
The bond with the 2% coupon will have a higher modified duration and higher price volatility.Correct
The 6% coupon bond is more sensitive because its higher price results in a larger absolute dollar change for each basis point.
The bond with the 6% coupon will have a higher modified duration due to its larger periodic cash flows.
Why
Modified duration increases when coupon rates are lower (less cash flow early in the bond's life) and when maturities are longer.
