Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, X, with a 5-year year to maturity and a 10% coupon rate.
2) A zero-coupon bond, Y, with a 5-year year to maturity and a 10% yield to maturity.
A) Bond X because of the higher yield to maturity
B) Bond X because of the longer time to maturity
C) Bond Y 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.

Question

Quizplus · Accepted Answer

Bond Y, the zero-coupon bond, is more price sensitive to changes in interest rates because it has a longer duration. Duration is a measure of the sensitivity of the price of a bond to a change in interest rates, and zero-coupon bonds have a duration equal to their time to maturity, making them more sensitive to interest rate changes than bonds that pay coupons.

Which of the Following Two Bonds Is More Price Sensitive