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.
A) Bond A because of the higher yield to maturity
B) Bond A because of the longer time to maturity
C) Bond B 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 B, the zero-coupon bond, is more price sensitive to changes in interest rates because it has a longer duration compared to a par-value bond with the same maturity. Zero-coupon bonds pay no coupons and thus have their entire cash flow at maturity, leading to higher interest rate sensitivity.

Which of the Following Two Bonds Is More Price Sensitive