Q5: (5) A newly issued non-callable, fixed-rate bond with 30-year maturity carri
ID: 2809509 • Letter: Q
Question
Q5: (5) A newly issued non-callable, fixed-rate bond with 30-year maturity carries a coupon rate of 5.5% and trades at par. Its (Macaulay) duration is 15.33 years and its convexity is 321.03. Which of the following statements about this bond is true? I. If the bond were to start trading at a discount, its duration would decrease Il If the bond were to start trading at a premium, its duration would decrease. I If the bond were to start trading at a discount, its duration would not change. IV. If the bond were to remain at par, its duration would increase as the bond aged.Explanation / Answer
As given in the question it is a fixed-rate bond, that means the only variable that we have here is the yied of the bond (YTM).
Talking about YTM, if we increase the yield more than 5.5%, then will lead to bond being sold at discount which will lead to decreasing bond's duration.
Therefore, option (A) would be the right option - if the bond start trading at a discount, its duration would decrease.
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