If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?
A) A 1-year bond with an 8% coupon.
B) A 10-year bond with an 8% coupon.
C) A 10-year bond with a 12% coupon.
D) A 10-year zero coupon bond.
E) A 1-year zero coupon bond.

Question

Quizplus · Accepted Answer

Zero-coupon bonds have the greatest sensitivity to changes in yield since they have no coupon payments to offset price changes. Therefore, a 1% decrease in yield will result in the largest percentage increase in value for a 10-year zero coupon bond.

If Its Yield to Maturity Declined by 1%, Which of the Following