Which of the following two bonds is more price sensitive to changes in interest rates?
1)A par value bond,D,with a 2-year-to-maturity and a 8% coupon rate.
2)A zero-coupon bond,E,with a 2-year-to-maturity and a 8% yield-to-maturity.

Question

Quizplus · Accepted Answer

The zero-coupon bond, E, is more price sensitive to changes in interest rates because it has a longer duration. As a zero-coupon bond, it does not pay any coupons, so its entire return at maturity depends on the price at that time. Since it has a longer time to maturity, any changes in interest rates will have a greater impact on its price. The par value bond, D, has a fixed coupon rate, so changes in interest rates will affect its price but not to the same extent as the zero-coupon bond.

Which of the Following Two Bonds Is More Price Sensitive