Question

Which bond’s price would be the most sensitive to an unexpected change in the interest rate?

		A zero coupon bond with 15 years to maturity
		A bond with a 5% coupon rate and 10 years to maturity.
		A bond with a 10% coupon rate and 10 years to maturity.
		A zero coupon bond with 10 years to maturity.

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Answer 1

Zero-coupon bonds are most sensitive to interest rate changes as these bonds pay only at maturity (no coupon payment). An investor would not receive any payment before maturity hence they are very sensitive to interest rate risk.

Higher maturity will make a bond more sensitive to interest rate risk as an investor would be risking its investment for a longer duration.

Hence, a zero-coupon bond with higher maturity would be most sensitive among the given options.

Hence, the first option is correct. (A zero-coupon bond with 15 years to maturity)

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