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Continued From Question 24: Assume that the coupon on bond A is 11% and coupon on...

Continued From Question 24: Assume that the coupon on bond A is 11% and coupon on Bond B is 5%. Both bonds have 8 years to maturity. Which bond will be more sensitive to changes in interest rates (duration)?

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Answer #1

A bond which have a lesser coupon will be more sensitive to any change in interest rates. This is such because when the bond is offering the lesser coupon rate and the interest rate changes in the market, and the prevalent market rate becomes greater than the bond coupon rate, then it will reduce the overall attractiveness of the bond, that is why a bond with low coupon rate is high sensitive to the interest rate changes.

So Bond B with coupon 5% would be more sensitive to any change in interest rate because it is offering lesser coupon rate.

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