Which of the following two bonds is more price sensitive to changes in interest rates?
1)A par value bond,A,with a 12-year-to-maturity and a 12% coupon rate.
2)A zero-coupon bond,B,with a 12-year-to-maturity and a 12% yield-to-maturity.

Question

Quizplus · Accepted Answer

Duration is a measure of a bond's sensitivity to interest rate changes, and the longer the duration, the more price sensitive the bond is. Bond B, being a zero-coupon bond, has a longer duration than Bond A, which means that it is more price sensitive to changes in interest rates. Bond A's higher yield to maturity means that it has a higher coupon payment, which may provide some cushion against interest rate changes, but it doesn't change the fact that its duration is lower than Bond B's. Option D is not correct because the fact that both bonds have the same yield to maturity does not necessarily mean that they have the same duration or price sensitivity.

Which of the Following Two Bonds Is More Price Sensitive