Citigroup Interview Question

Take a bond with 5% coupon, 4% yield, and 5 years to maturity. Is that bond selling at a premium or discount? Take the same situation, but with 10 years to maturity. Which bond sells for a higher price?

Sales and Trading Analyst: Round 1

2 answers

1
votes

Since the yield of the bond is below the coupon, then it is selling at a premium. If the bond was trading at par, then the coupon = yield, and as prices rise, yield falls, so the bond is trading at a premium (above par). A 10year note has a greater duration than a 5 year note, so a 1% change in yield will have a greater effect on the price of the 10y vs the 5y, thus the 10 year will have the higher price. This question is to test your knowledge of the inverse relationship between price and yield, as well as your concept of duration.

0
votes

The bond with higher duration will have a higher price

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