Which of the following bonds has the greatest interest rate price risk?
A) A 10-year $100 annuity.
B) A 10-year, $1,000 face value, zero coupon bond.
C) A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
D) All 10-year bonds have the same price risk since they have the same maturity.
E) A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.

Question

Quizplus · Accepted Answer

Zero coupon bonds have the highest interest rate price risk since they have no coupon payments to offset changes in interest rates. The price of a zero coupon bond is entirely dependent on changes in interest rates, making it the most sensitive to interest rate fluctuations.

Which of the Following Bonds Has the Greatest Interest Rate