Say i have two 3 year bonds, which pay an annual coupon of 8% (1st bond) and 10% (2nd bond) respectively. Also, let's assume, that the spot curve is the same for both bonds. Other things equal, how can i compare the IRRs of these 2 bonds? (Only using the fact, that the spot rates are the same)?
This was a question from my exam today, and i was really confused. I was given the IRR of the second bond, it was 8.87, i had to select one of 3 possible answers for the first bond's IRR: a)8.9 b)8.87 c)8.7
When i got home, i did a couple of simple simulations, and managed to get 3 sets of spot rates, for which the IRR of the second bond was 8.9 and 8.87 and 8.7
So is there some logic that i should have used in order to get to the answer or no? Is there a right answer? I mean, although i got the spots for each of the answers, they looked quite awkward (e.g. the spots for 8.7 were 15.43, 23.32, 7.88), so is the answer assuming that it's logic should be right for MOST of the spot rates (or at least those near to reality)?