Which of the Following Bonds Will Be Most Sensitive to a Change

question 24

Multiple Choice

Which of the following bonds will be most sensitive to a change in interest rates if all bonds have the same initial yield to maturity?

• A)a ten-year bond with a $1000 face value whose coupon rate is 5.8% APR paid semi-annually
• B)a ten-year bond with a $1000 face value whose coupon rate is 7.4% APR paid semi-annually
• C)a 20-year bond with a $1000 face value whose coupon rate is 5.8% APR paid semi-annually
• D)a 20-year bond with a $1000 face value whose coupon rate is 7.4% APR paid semi-annually
• E)a 15-year bond with a $1000 face value whose coupon rate is 6.6% APR paid semi-annually

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Definitions:

Annuity

An annuity is a financial instrument that provides a consistent series of payments to a person, often serving as a source of income for people in retirement.

Present Value Index

A calculation that compares the present value of net cash inflows to the initial investment, used to evaluate the profitability of an investment.

Computed

Refers to something that has been determined or calculated using a computer or calculator.

Net Present Value

A method used in capital budgeting to assess the profitability of an investment or project, calculated by discounting the expected future cash flows to their present values and subtracting the initial investment.