Which of the Following Two Bonds Is More Price Sensitive

question 24

Multiple Choice

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, X, with a 5-year year to maturity and a 10% coupon rate.
2) A zero-coupon bond, Y, with a 5-year year to maturity and a 10% yield to maturity.

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

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Definitions:

Long-Term Assets

Assets that a company plans to hold for more than one fiscal year, such as buildings, land, and equipment.

Current Ratio

A financial ratio indicating a firm's capacity to settle short-term liabilities using its short-term assets.

Noncurrent Assets

Long-term assets not expected to be converted into cash within one year, such as property, plant, and equipment.

Stockholders' Equity

The residual interest in the assets of a corporation after deducting its liabilities, representing the owners' claim on the company's assets.