SIE practice questionhardDuration and Convexity
If interest rates increase sharply, which bond will experience the largest percentage price decline?
- AShort-duration, high coupon bond
- BLong-duration, low coupon bond✓ Correct answer
- CConvertible bond
- DPutable bond
Explanation
Why B — Long-duration, low coupon bond
Longer duration and lower coupon make bonds more sensitive to rate changes. Convertibles and putables have unique features that can mitigate rate risk.
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