Other things being the same, which of the following bonds has the highest interest rate sensitivity?Question 12Select one:a.A 15-year maturity, 6% coupon bondb.A 5-year maturity, 3% coupon bondc.A 5-year maturity, 6% coupon bondd.A 15-year maturity, 3% coupon bond
Question
Other things being the same, which of the following bonds has the highest interest rate sensitivity?Question 12Select one:a.A 15-year maturity, 6% coupon bondb.A 5-year maturity, 3% coupon bondc.A 5-year maturity, 6% coupon bondd.A 15-year maturity, 3% coupon bond
Solution
The bond with the highest interest rate sensitivity would be "d. A 15-year maturity, 3% coupon bond".
Here's why:
Interest rate sensitivity of a bond is determined by its duration, which is affected by both the bond's maturity and its coupon rate.
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Maturity: Longer maturity bonds have higher durations, meaning they are more sensitive to interest rate changes. So, a 15-year bond would be more sensitive than a 5-year bond.
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Coupon Rate: Lower coupon bonds have higher durations, meaning they are more sensitive to interest rate changes. So, a 3% coupon bond would be more sensitive than a 6% coupon bond.
Therefore, combining these two factors, a 15-year maturity, 3% coupon bond (option d) would have the highest interest rate sensitivity.
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