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 options are correct.
C. Bond B because of the longer duration
Duration is the best measure of bond price sensitivity; the longer the duration the higher the price sensitivity.
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