Which of the following statements is CORRECT?
A) You hold two bonds,a 10-year,zero coupon,issue and a 10-year bond that pays a 6% annual coupon.The same market rate,6%,applies to both bonds.If the market rate rises from its current level,the zero coupon bond will experience the larger percentage decline.
B) The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
C) You hold two bonds.One is a 10-year,zero coupon,bond and the other is a 10-year bond that pays a 6% annual coupon.The same market rate,6%,applies to both bonds.If the market rate rises from the current level,the zero coupon bond will experience the smaller percentage decline.
D) The shorter the time to maturity,the greater the change in the value of a bond in response to a given change in interest rates,other things held constant.
E) The longer the time to maturity,the smaller the change in the value of a bond in response to a given change in interest rates.

Question

Quizplus · Accepted Answer

Zero coupon bonds are more sensitive to changes in interest rates compared to coupon-paying bonds of the same maturity because they offer only one payment at maturity. Therefore, a rise in market rates would indeed cause a larger percentage decline in the price of the zero coupon bond compared to a similar coupon bond.

Which of the Following Statements Is CORRECT