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All treasury securities has a yield to maturity of 7% so the yield curve is flat
All treasury securities has a yield to maturity of 7% so the yield curve is flat. If the yield to maturity on all Treasuries were to decline to 6%, which of the following bonds would have the largest percentage increase in price and why?
a. 15 year zero coupon Treasury bond
b. 12 year Treasury bond with 10% annual coupon
c. 15 year Treasury bond with a 12% annual coupon
d. 2 year zero coupon treasury bond
e. 2 year Treasury bond with a 15& annual coupon
Expert Solution
As the YTM decrease, the price of the bonds would increase. However, the increase in price is higher for:
1. Bonds with longer time to maturity everything else keeping same.
2. Bonds with lower coupon will have higher change in price keeping everything else same.
Thus, the bond with maximum duration and minimum coupon will have the highest percent increase. The bond in a) a. 15 year zero coupon Treasury bond has the highest time to maturity and least coupon hence this is the answer.
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