Which of the following statements is CORRECT?
A)You hold two bonds.One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon.The same market rate, 6%, applies to both bonds.If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.
B)The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
C)You hold two bonds.One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon.The same market rate, 6%, applies to both bonds.If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.
D)The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.
E)The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.

Question

Quizplus · Accepted Answer

Zero coupon bonds have a higher sensitivity to changes in interest rates compared to coupon bond with the same maturity because all their payments are received at maturity. As a result, the zero coupon bond will experience a larger percentage decline in value compared to the 6% coupon bond when interest rates rise.

Which of the Following Statements Is CORRECT