A coupon bond has 10-years to maturity and a YTM of 8%. If the YTM instantaneously...
A coupon bond has 10-years to maturity and a YTM of 8%. If the
YTM instantaneously increases to 9%, what happens to the
bond’s
price and duration?
Question 1 options:
|
The price decreases and the duration increases. |
|
|
The price increases and the duration decreases. |
|
|
The price decreases and the duration decreases. |
|
|
The price decreases and the duration stays the same. |
Homework Answers
YTM and the Price of the Bond has an inverse Relationship.i.e. Increase in YTM will lead to decrease in Value of Bond, that is because Value of Bond is calculated by dividing the Coupon by YTM. So YTM is in Denominator and when denominator increases value decreases.
Also, the Value of Bond and duration of Bond have inverse relationship because of the same (Denominator) reason. When value of Bond Decreases, the Duration of bond increases.
So when the YTM Increases Value of Bond of Decreases and when value of the Bond decreases, duration increases.
So, Option A is Correct.
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