Which of the Following Two Bonds Is More Price Sensitive

question 74

Multiple Choice

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par-value bond, D, with a 2 year to maturity and an 8% coupon rate.
2) A zero-coupon bond, E, with a 2 year to maturity and an 8% yield to maturity.

• A) Bond D because of the higher yield to maturity
• B) Bond E because of the longer duration
• C) Bond D because of the longer time to maturity
• D) Both have the same sensitivity because both have the same yield to maturity.

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Definitions:

Imports and Exports

Transactions involving the buying (imports) and selling (exports) of goods and services between countries.

Interest Rate Effect

The impact that changing interest rates have on consumer spending and business investments in an economy, generally influencing economic activity.

Price Level

The mean value of prices for the full range of goods and services in the economy.

Consumption and Investment

Elements of economic activity where consumption represents spending by households on goods and services, while investment refers to spending on capital goods that will be used for future production.