Suppose the yield to maturity (YTM) drops by 1% on two equivalent risk bonds with 13% coupons. Which bond will see a larger change in its price: the one-year to maturity bond OR the five year to maturity bond?
a) The one year to maturity bond's price will change more
b) The five year to maturity bond's price will change more
c) Both bond prices will change equally
d) The relative change in the bond prices is unpredictable.
The solution identify changes in price when YTM drops.