Question

1. Bond A has a coupon rate of 6%, and has 15 years remaining until maturity. Bond B has a coupon rate of 12%, and also has 15 years remaining until maturity. We can say that:

   		Bond B’s price is probably more sensitive to changes in interest rates.
   		Bonds A and B were issued by the same company (as they have the same maturity).
   		The company issuing Bond A is financially weaker than the company issuing Bond B.
   		Bond A’s price is probably more sensitive to changes in interest rates.
   		The company issuing Bond A has the greater chance of bankruptcy.

Answer 1

Bond A’s price is probably more sensitive to changes in interest rates is correct

The bond price is the present value of all the cash flows it is going to generate in the future, the discount rate used to calculate the present value is the market interest rate, if the interest rate is higher then the coupon rate then the value of bond gets lower than face value as the discounting of cash flows are higher and vice-versa.

The bonds with the lower coupon rate is tend to be more price sensitive as the percentage change in the bond price is higher than bond with higher coupon rate because of greater discounting of cash flows.