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-to-maturity and a 10% coupon rate.
2)A zero-coupon bond,Y,with a 5-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 these

Question

Quizplus · Accepted Answer

Bond Y is a zero-coupon bond, which means it has a longer duration and therefore is more price sensitive to changes in interest rates. Duration measures the sensitivity of a bond's price to changes in interest rates and is higher for zero-coupon bonds because they have only one cash flow at maturity, which is further in the future. Bond X has a coupon rate of 10%, which means it will receive periodic interest payments, reducing its duration and making it less sensitive to changes in interest rates. The yield to maturity for both bonds is the same, but that doesn't affect their sensitivity to interest rates.

Which of the Following Two Bonds Is More Price Sensitive