Asked by AGUSTINA RATNA DWIATI on Jul 05, 2024
Verified
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 the options are correct.
Price Sensitive
Characteristic of information or news that could influence the price of securities if it were made public.
Zero-Coupon Bond
A type of bond that does not pay interest during its life but is sold at a discount from its face value and redeemed at par at maturity.
- Uncover the influences on bond duration and how they dictate the fluctuation in bond price stability.
Verified Answer
ZK
Zybrea KnightJul 06, 2024
Final Answer :
C
Explanation :
Bond B, the zero-coupon bond, is more price sensitive to changes in interest rates because it has a longer duration compared to a par-value bond with the same maturity. Zero-coupon bonds pay no coupons and thus have their entire cash flow at maturity, leading to higher interest rate sensitivity.
Learning Objectives
- Uncover the influences on bond duration and how they dictate the fluctuation in bond price stability.
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