Two Bonds w/ Different Maturities but Same Price / Face. Which has higher yield?
Can someone explain why they have the same yield? Wouldn't a longer maturity imply a higher yield to compensate for the additional risk?
Thank you!
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I'm assuming youre asking about the coupons? I got asked this question in an RX interview, and the guy didn't tell me the coupons. I asked, and he had to think for a few seconds, then decided "Ok, let's say the have the same coupons". So I wanted to check if someone on here has a good intuition without additional info lol Mostly Random Dude It was just such a vague question in the way it was asked -- sounded like a "trick question" that I was supposed to know from a guide or smth lol
Yes, a longer maturity implies a higher yield.
I said that, and my interviewer said they'd have the same yield, and he was like "Just look at the formula" Thoughts? @Extraordinarily Dry Tuna Sandwich"
there are many other things that could impact a bond price, like credit worthiness, place in the capital structure, embedded put/call options. however, assuming all things being equal...
2 bonds with same coupon, same price, but different maturity dates
1) as price goes below par (100), for the same price, the shorter maturity will have a higher yield 2) as price goes above par, the shorter maturity will have a lower yield 3) when the price is par (100) they will both yield the coupon, and thus have the same yield.
this is because for the same price movement, a shorter maturity bond yield moves more.
we more often refer to PV01, the price value of a 1 basis point move in yield (but the question you asked is opposite...its the yield value of a change in price...similar...but from the opposite perspective)
shorter maturity bonds have a lower PV01....a 1 basis point move in yield has a small impact on price. conversely, it takes a small move in price to create a large move in yield (for a shorter maturity bond)....2 sides of the same coin.
This is exactly correct. You can use this YTM calculator to check.
Ah, here's the spin. If they have the same coupon, and if they have the same price and face value, then they should still have the same yield. A longer maturity usually implies higher yield, but also a higher coupon. If coupons are set to be equal, then yields are the same.
exactly. the scenario they gave the OP is entirely hypothetical and doesn't make practical sense.
unless we somehow enter a flat-yield-curve environment
there are many cases where you have flat yield curves. in the US, we almost have a flat yield curve at the 7-10yr part of the curve (now 4 bps). The 10-30 curve is now 17bps, and looks like it will go flat / invert within the next few months...so this does indeed happen. The 10/30 curve was last inverted in 2006 i believe.
anyway...it happens...
This reminds me of an "accidental" interview years ago. A head hunter called regarding an interview for an exotics job. As I was waiting at a lobby, someone shows up, asks me if I am "Jerome" (as an example, a common non-American name) and takes me upstairs. Upstairs, we go into a conference room and some dude starts by asking me a question about American options (something along the lines of "do you early-X calls or puts?". I naturally assume that he wants an advanced discussion and delve into the various corner cases, from the div gamma to the takeout risk etc. He stares at me blankly and goes on to say "I don't think you understand enough about options to work in our risk department".
Apparently, another guy with my first name was supposed to show up for an interview with risk, but I got picked up at the lobby instead. I got the exotics job.
hahaha! at what point did they realise their mistake? must have been some red faces in the office that day.
Answer might have been that the bonds weren't treasury bonds, and instead bonds for companies. In this case the companies issuing the bonds may have different levels of risk associated with them.
Nisi qui expedita saepe et. Sunt fugiat delectus et magni delectus ut.
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