SIE practice questionhardBond Duration and Interest Rate Risk
Which bond would be MOST sensitive to changes in interest rates?
- AA 30-year zero-coupon bond✓ Correct answer
- BA 10-year floating-rate note
- CA 5-year bond with a 7% coupon
- DA 2-year bond with a 5% coupon
Explanation
Why A — A 30-year zero-coupon bond
Interest rate sensitivity increases with longer maturities and lower coupon rates. A 30-year zero-coupon bond has the longest duration of these choices because it has the longest maturity AND pays no periodic interest (all cash flow comes at maturity). Floating-rate notes (D) have minimal interest rate risk because their coupons adjust. Shorter maturities and higher coupons reduce sensitivity.
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