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 an 8% coupon rate.
2) A zero-coupon bond, E, with a 2 year to maturity and an 8% yield to maturity.
A) Bond D because of the higher yield to maturity
B) Bond E because of the longer duration
C) Bond D because of the longer time to maturity
D) Both have the same sensitivity because both have the same yield to maturity.

Question

Quizplus · Accepted Answer

Bond E, 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 their duration equals their time to maturity, making them more sensitive to interest rate changes.

Which of the Following Two Bonds Is More Price Sensitive