Question

Bond A has 2 years to maturity, 5% coupon rate, 5% YTM, $1000 par value, and semiannual coupons.

Bond B has 10 years to maturity, 5% coupon rate, 5% YTM, $1000 par value, and semiannual coupons.

Bond C has 10 years to maturity, 4% coupon rate, 5% YTM, $1000 par value, and semiannual coupons.

Which comparison is TRUE?

• A.

  Bond A has higher price sensitivity than Bond B

• B.

  Bond C has higher price sensitivity than Bond A

• C.

  Bond B has higher price sensitivity than Bond A

• D.

  Bond B has higher price sensitivity than Bond C

Answer 1

The correct answer is Option B

The Bond A and B has Yield to maturity same as the coupon rate which means that the value of the bond will be the par value while for bond C the Yield to maturity is higher than coupon rate which will lead the bond value to below the face value which makes it more price sensitive.

The Bond value is the total sum of discounted value of cash flows ( Coupons and face value) and the discount rate used is the yield to maturity, If it is higher then it leads to greater discounting of cash flows leading the value below the par value.