Practice Quiz 2 — Duration & Interest Rate Risk

You hold two bonds, each with face value $1,000 and a YTM of 5%:

Bond X: 3-year zero-coupon bond
Bond Y: 3-year bond with a 10% annual coupon

(a) Which bond has a higher Macaulay duration? Explain in one sentence without doing a full calculation.

(b) Bond X has a modified duration of approximately 2.86 years. If yields rise by 50bp (0.50%), estimate the percentage price change of Bond X.

(c) A client says: “I want to earn the higher coupon on Bond Y, and it’s the same maturity, so it has the same risk as Bond X.” Is the client right or wrong? Explain in 1–2 sentences using duration.