Series 7 practice questionhardDebt Securities — Corporate Bonds — Duration Concept
Which of the following bonds would have the GREATEST price sensitivity to a change in interest rates?
- AA 5-year bond with a 7% coupon
- BA 2-year bond with a 3% coupon
- CA 10-year bond with a 10% coupon
- DA 30-year zero-coupon bond✓ Correct answer
Explanation
Why D — A 30-year zero-coupon bond
Bond price sensitivity to interest rate changes (duration) increases with longer maturities and decreases with higher coupon payments. A 30-year zero-coupon bond has the highest duration because it has the longest maturity and makes no interim coupon payments — all cash flow is received at maturity. Zero-coupon bonds have the highest duration for any given maturity because there are no coupon payments to shorten the weighted-average time of cash flows.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 755+ Series 7 questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Related Investment Information & Recommendations questions
- An investor holds a convertible bond ($1,000 par, 4% coupon) convertible into 20 shares of stock. The stock is trading…
- When analyzing a general obligation bond, which factor is MOST important?
- Which type of municipal bond interest may be subject to the Alternative Minimum Tax (AMT)?
- An investor purchases a TIPS with a par value of $1,000 and a 2% coupon rate. After one year, the CPI has increased by…