Yield Curve Shift and Bond Price Change

B

To determine which noncallable bond would have experienced the least percentage change in price as a result of the yield curve shift, we need to consider the characteristics of each bond and how they interact with changes in interest rates.

First, let's understand the impact of a yield curve shift. When the yield curve shifts, it means that the yields on different maturities of bonds change by the same amount. In this case, the yield curve experienced an upward parallel shift of 112 basis points, which means that the yields on all maturities increased by 112 basis points (or 1.12%).

Now let's analyze each bond option:

A. A 6% coupon corporate bond maturing in ten years. This bond has a fixed coupon rate of 6%. When interest rates rise, the value of existing bonds with fixed coupon rates typically decreases. This is because new bonds issued in the market will have higher coupon rates, making existing bonds with lower coupon rates less attractive. Additionally, bonds with longer maturities are generally more sensitive to interest rate changes. Therefore, this bond is likely to experience a significant decrease in price due to the yield curve shift.

B. A 6% coupon corporate bond maturing in five years. Similar to option A, this bond also has a fixed coupon rate of 6%. However, it has a shorter maturity of five years. Bonds with shorter maturities are generally less sensitive to interest rate changes compared to longer-maturity bonds. Additionally, the impact of interest rate changes on bond prices tends to be more pronounced for bonds with lower coupon rates. Since this bond has a higher coupon rate than option C, it is expected to experience a smaller percentage change in price compared to option A and C.

C. A 0% coupon U.S. government bond maturing in ten years. This bond has a zero coupon rate, which means it does not pay any interest during its term but is sold at a discount to its face value. Zero-coupon bonds are highly sensitive to changes in interest rates because their returns are entirely derived from the difference between the purchase price and the face value. In this case, the bond has a longer maturity of ten years, making it more sensitive to interest rate changes. Therefore, this bond is likely to experience a significant decrease in price due to the yield curve shift.

Based on the above analysis, option B, the 6% coupon corporate bond maturing in five years, is expected to experience the least percentage change in price as a result of the yield curve shift.