Which of the Following Two Bonds Is More Price Sensitive

question 57

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 the above

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Definitions:

Profit Maximization

The procedure a corporation uses to ascertain the optimal price and quantity of production for maximum earnings.

Production Function

An economic model expressing the relationship between inputs (like labor and capital) and the quantity of output produced.

Profit Maximization

The process or strategy of adjusting the production and sale of goods and services to achieve the highest possible profit levels.

Production Function

An equation that describes the relationship between the inputs used in production and the output generated from those inputs.