Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy 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 have the highest sensitivity to changes in interest rates, which means that they will experience the greatest percentage increase in value if all interest rates in the economy fall by 1%. Thus, the 20-year, zero coupon bond (choice E) would have the greatest percentage increase in value.

Which of the Following Bonds Would Have the Greatest Percentage