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:

Savers

Individuals or entities that set aside a portion of their income for future use, often in interest-bearing accounts or investments.

Financial Markets

Markets where financial securities, such as stocks and bonds, are issued and traded among investors.

Investment Tax Credit

A tax credit offered to businesses to encourage them to invest in certain assets, reducing their tax liability.

Interest Rates

The cost of borrowing money or the reward for saving, typically expressed as a percentage of the amount borrowed or saved annually.