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  • Bond X has a coupon

  • Bond Y is a zero-coupon bond (Maturity 2 years)

  • Bond Z is a zero-coupon bond (Maturity 10 years)

The following graph is given:

bondXYZ

X-axis: yield curve, Y-axis: price

Question: Which bond corresponds to which curve?

What is the way to solve a question like this? A little help is appreciated.

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  • $\begingroup$ This looks like a homework to me. $\endgroup$ – SmallChess Apr 9 '15 at 23:46
  • $\begingroup$ Ask yourself: if everything is the same, do you prefer a zero-coupon bond with 2 years or 10 years? The bond that you prefer will also be more expensive because everybody wants it too. What's the relationship with the yields? $\endgroup$ – SmallChess Apr 9 '15 at 23:50
  • $\begingroup$ The holder of a zero-coupon bond receives only at the end date a payment. A 2 years would be more preferable. $\endgroup$ – clubkli Apr 10 '15 at 0:15
  • $\begingroup$ What has that to do with the yields? Once you know it, read again the shape of yield-curve for a zero-coupon-bond in a text book, you should know the answer. $\endgroup$ – SmallChess Apr 10 '15 at 0:17
  • $\begingroup$ Bond prices and interest rates move in opposite direction. For a high value of the yield, the 2 year bond would be more expensive than the 10 year bond. $\endgroup$ – clubkli Apr 10 '15 at 0:34

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