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:

Variable Costing

A cost system that excludes fixed costs from product costs and writes off all fixed costs against income in the year that the costs are incurred. Also called direct costing.

Step-fixed Costs

Expenses that remain constant for a set level of production or output, but can change when a certain threshold is crossed.

Inflationary Price Increase

The rise in prices of goods and services over time, typically due to an increase in the money supply or demand outpacing supply.

Reconciled

The process of making sure that two sets of records (usually the balances of two accounts) are in agreement.