Which of the Following Two Bonds Is More Price Sensitive

question 22

Multiple Choice

Which of the following two bonds is more price sensitive to changes in interest rates?
1) A par value bond,A,with a 12-year-to-maturity and a 12% coupon rate.
2) A zero-coupon bond,B,with a 12-year-to-maturity and a 12% yield-to-maturity.

• A) Bond A because of the higher yield to maturity.
• B) Bond A because of the longer time to maturity.
• C) Bond B because of the longer duration.
• D) Both have the same sensitivity because both have the same yield to maturity.
• E) None of these is correct.

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Definitions:

Interest Method

A financial calculation technique used to allocate interest expense or income over a specific period, based on the principal amount and the interest rate.

Bonds Issued

refers to the creation and sale of bonds by an issuer to investors as a form of borrowing, usually to raise capital for long-term investments.

Semiannual Interest

An interest payment made twice a year on a loan or investment.

Issuance Date

The date on which a financial instrument (e.g., bond, stock, or certificate of deposit) is issued or made available for sale.