Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?
A) 20-year, 10% coupon bond.
B) 20-year, 5% coupon bond.
C) 1-year, 10% coupon bond.
D) 20-year, zero coupon bond.
E) 10-year, zero coupon bond.

Question

Quizplus · Accepted Answer

Zero-coupon bonds have the highest sensitivity to interest rate changes, making them the most volatile. Therefore, the 20-year zero coupon bond would have the greatest percentage increase in value if all interest rates fall by 1%.

Which of the Following Bonds Would Have the Greatest Percentage