Assume that all interest rates in the economy decline from 10% to 9%.Which bond would have the largest percentage increase in price?

Question

Quizplus · Accepted Answer

The longest-term bond, a 10-year zero coupon bond, would have the largest percentage increase in price because its value is most sensitive to changes in interest rates. As all interest rates in the economy decline, the bond's price will increase by the most significant percentage because there are no coupon payments to offset the impact of the lower interest rate environment. The other bonds mentioned have either higher coupon payments, shorter maturities, or both, which would dampen the effect of the decline in interest rates on their prices.

Assume That All Interest Rates in the Economy Decline from 10