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.

Question

Quizplus · Accepted Answer

Bond Y is a zero-coupon bond, which means that it has no coupon payments and therefore has a longer duration. Duration measures the sensitivity of a bond's price to changes in interest rates. The longer the duration, the more price sensitive the bond is to changes in interest rates. Therefore, bond Y is more price sensitive to changes in interest rates than bond X.

Which of the Following Two Bonds Is More Price Sensitive