Homework Answers
- Longer the maturity more sensitive the price is to movements in interest rates. So definitely, 12 year bonds are more sensitive so last two options are eliminated
- Zero coupon bond is more sensitive because all of its investement can be recovered only at the time of maturity. For coupon bonds, with each coupon payment, some of the initial investment is recovered so it is less risky and therefore, the bond price is less sensitive for coupon bonds than for zero coupon bond.
- So 1st option is correct.
- The concept applied here is known as duration of a bond and that is the highest for zero coupon bond.
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