You have two bonds, a 5-year zero coupon bond and a 5-year 6% coupon bond (paid

Question

You have two bonds, a 5-year zero coupon bond and a 5-year 6% coupon bond (paid semi-annually) -- which will be more sensitive to interest rate movements? 5-year zero coupon bond 5-year 6% coupon bond You have two bonds, a 5-year zero coupon bond and a 5-year 6% coupon bond (paid semi-annually) -- which will be more sensitive to interest rate movements? 5-year zero coupon bond 5-year 6% coupon bond You have two bonds, a 5-year zero coupon bond and a 5-year 6% coupon bond (paid semi-annually) -- which will be more sensitive to interest rate movements? 5-year zero coupon bond 5-year 6% coupon bond You have two bonds, a 5-year zero coupon bond and a 5-year 6% coupon bond (paid semi-annually) -- which will be more sensitive to interest rate movements? 5-year zero coupon bond 5-year 6% coupon bond

Explanation / Answer

Sensitivity of bond prices have direct relationship with coupon rates. If coupon rates are higher, bond will be more sensitive and if interest rates re lower, bond will be less sensitive.

Hence, correct option is “5-year 6% coupon bond” as it has higher coupon rate.

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