Asked by Trinity Honaker on May 31, 2024
Verified
Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, X, with a 5-year year to maturity and a 10% coupon rate.
2) A zero-coupon bond, Y, with a 5-year year to maturity and a 10% yield to maturity.
A) Bond X because of the higher yield to maturity
B) Bond X because of the longer time to maturity
C) Bond Y because of the longer duration
D) Both have the same sensitivity because both have the same yield to maturity.
E) None of the options are correct.
Price Sensitivity
A measure of how the price of a product or service affects the demand for that product or service.
Par Value Bond
A bond that is selling for its original face value, as opposed to above (a premium) or below (a discount).
- Discern the aspects affecting the stability of bond prices and their time to maturity.
- Evaluate and distinguish between the duration and interest-rate risk across diverse bond types.
Verified Answer
KJ
Kimora JordanJun 05, 2024
Final Answer :
C
Explanation :
Bond Y, the zero-coupon bond, is more price sensitive to changes in interest rates because it has a longer duration. Duration is a measure of the sensitivity of the price of a bond to a change in interest rates, and zero-coupon bonds have a duration equal to their time to maturity, making them more sensitive to interest rate changes than bonds that pay coupons.
Learning Objectives
- Discern the aspects affecting the stability of bond prices and their time to maturity.
- Evaluate and distinguish between the duration and interest-rate risk across diverse bond types.
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