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.

Question

Quizplus · Accepted Answer

Bond B is more price sensitive to changes in interest rates because it has a longer duration due to being a zero-coupon bond. Duration measures the bond's sensitivity to changes in interest rates, and it is higher for bonds with longer maturities and lower coupon rates, such as zero-coupon bonds. Bond A's coupon payments provide some stability in price, making it less sensitive to interest rate changes compared to Bond B.

Which of the Following Two Bonds Is More Price Sensitive