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Answer: A bond with a higher coupon rate will have a lower yield to maturity than one with a lower coupon rate.
## Explanation **B is correct.** When the term structure is upward-sloping, a bond with a higher coupon rate will have a lower yield to maturity (YTM). This is because: - In an upward-sloping yield curve, longer-term rates are higher than shorter-term rates - Higher coupon bonds receive more of their cash flows earlier (when rates are lower) - Lower coupon bonds receive more of their cash flows later (when rates are higher) - Therefore, the YTM (which is a weighted average of the spot rates) will be lower for higher coupon bonds **A is incorrect.** When the term structure is upward-sloping, a bond with a higher coupon rate will typically have a higher price, not lower. **C is incorrect.** As the coupon increases, the average time to the cash flows decreases. This means Macaulay duration will decrease, not increase, for higher coupon bonds. **D is incorrect.** This is an oversimplification of the relationship between coupon rate and default probability. There are many other factors that determine default probability, such as the issuer's financial health, industry conditions, and macroeconomic factors.
Author: LeetQuiz .
An intern on the fixed-income trading desk of an investment bank has been asked to assess the relative value of several bonds issued by the same issuer, with the same maturity date, but with different coupon rates. The intern consults a senior trader about appropriate ways to compare the values of the bonds, and the trader explains the implications of the coupon effect. If the term structure of interest rates is upward-sloping and the bonds are correctly priced in the market, which of the following would the trader be correct to state as a result of the coupon effect?
A
A bond with a lower coupon rate will be worth more than one with a higher coupon rate.
B
A bond with a higher coupon rate will have a lower yield to maturity than one with a lower coupon rate.
C
A bond with a higher coupon rate will have a higher Macaulay duration than one with a lower coupon rate.
D
A bond with a lower coupon rate will have a lower probability of default than one with a higher coupon rate.
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