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

Which bond’s price would be the most sensitive to an unexpected change in the interest rate? Please provide the formula you used, and show your work. a) A bond with a 5% coupon rate and 10 years to maturity b) A zero coupon bond with 15 years to maturity c) A zero coupon bond with 10 years to maturity d) A bond with a 10% coupon rate and 10 years to maturity.

Solutions

Expert Solution

Lets assume Face value of these bonds as $1,000

Also, assume yield to Maturity as 10% and find the price of the bond. Further, also assume that yield reduces by 1% to 9% and find the revised price of the bond.

As can be seen above, a change in interest rate (yield) impacted the 15 years zero coupon bond the most. This is primarily due to the greater maturity period.

Thus, the answer is : option b) A zero coupon bond with 15 years to maturity is the most sensitive to an unexpected change in the interest rate.

Workings:

jeff jeffy answered 1 year ago

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