The rice value of a basis ponr PV measures the change n the price of a bond if t

Question

The rice value of a basis ponr PV measures the change n the price of a bond if the yeld changes by one basis point one one hundredth of a percent 01%) PVBP is expressed as the absolute value of the change n pnce For example, tf the yeld on a bond n ses lorn 8% to 801% and the bond ice fais by SO 392 on $1,000 face), then the PVBP is 0 3992 Drawing on your knowledge of the price-yield propertes of coupon bonds, which of the following bonds has the highest PVBP? Select the best choice below) 5years, 8% coupon B. 10 years, 8% coupon C. 15 years, 8% coupon D. 20 years, 8% coupon 0 E. 25 years, 8% coupon

Explanation / Answer

A bond with higher maturity is more price sensitive with interest rate. if interest rate constant then a bond with highest maturity chnage its price higher than lower maturity bond.

So, a bond with 25 year maturity at 8% coupon rate is highest price sensitive, it mean is yield change by 0.01% then price of 25 year bond change most.

So, highest PVBP is for bond 25 year 8% bond.

Option (A) is correct answer.

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