Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%? A) 10-year, zero coupon bond. B) 20-year, 10% coupon bond. C) 20-year, 5% coupon bond. D) 1-year, 10% coupon bond. E) 20-year, zero coupon bond.

Question

Quizplus · Accepted Answer

Zero coupon bonds are more sensitive to interest rate changes because they do not pay periodic interest, and the longer the maturity, the greater the sensitivity. Therefore, a 20-year zero coupon bond would have the greatest percentage increase in value if interest rates fall by 1%.

Which of the Following Bonds Would Have the Greatest Percentage