Which set of conditions will result in a bond with the greatest volatility?
A) a high coupon and a short maturity
B) a high coupon and a long maturity
C) a low coupon and a short maturity
D) a low coupon and a long maturity
E) a deferred call feature and a sinking fund

Question

Quizplus · Accepted Answer

The bond with a low coupon and a long maturity will have the greatest volatility because it is sensitive to changes in interest rates over a longer period, and the low coupon means it is more susceptible to fluctuations in the market value of the bond. High coupon bonds have a lower sensitivity to interest rate changes, and shorter maturities result in lower price volatility. The deferred call feature and sinking fund would have no impact on the volatility of the bond.

Which Set of Conditions Will Result in a Bond with the Greatest