Which of the following two bonds is more price sensitive to changes in interest rates?
1)A par value bond,A,with a 12-year-to-maturity and a 12% coupon rate.
2)A zero-coupon bond,B,with a 12-year-to-maturity and a 12% yield-to-maturity.
A) Bond A because of the higher yield to maturity.
B) Bond A because of the longer time to maturity.
C) Bond B because of the longer duration.
D) Both have the same sensitivity because both have the same yield to maturity.
E) None of these is correct.

Question

Quizplus · Accepted Answer

Bond B, the zero-coupon bond, is more price sensitive to changes in interest rates because it has a longer duration than Bond A. Duration is a measure of the sensitivity of the bond's price to changes in interest rates, and it is influenced by the length of time until the bond matures and the bond's coupon rate. Zero-coupon bonds have a longer duration than similar coupon-paying bonds because the lack of coupons means that all the cash flows occur at the bond's maturity, making the cash flows more sensitive to changes in interest rates. Therefore, Bond B, with a longer duration, is more price sensitive to interest rate changes.

Which of the Following Two Bonds Is More Price Sensitive