Everything else the same, if the yield to maturity decreased 1 percentage point, which of the following bonds would have the largest percentage increase in value?
A) A 25-year 11% coupon bond.
B) A 25-year 7.5% coupon bond.
C) A 25-year zero-coupon bond.
D) A 3-year zero coupon bond.
E) A 3-year bond with a 7.5% coupon.

Question

Quizplus · Accepted Answer

The largest percentage increase in value would occur for the bond with the longest maturity and lowest coupon rate, which is a 25-year zero-coupon bond. Zero-coupon bonds have no intermediate cash flows, so their prices are particularly sensitive to changes in the yield to maturity. The other bonds have intermediate cash flows in the form of coupons, which can partially offset changes in the yield to maturity.

Everything Else the Same, If the Yield to Maturity Decreased