Consider the following bonds: Bond............Coupon Rate (annual payments)...................Maturity (years) A........................................ 0% ........................................ 15 B........................................ 0% ........................................ 10

Question:

Consider the following bonds:

Bond............Coupon Rate (annual payments)...................Maturity (years)

A........................................ 0% ........................................ 15

B........................................ 0% ........................................ 10

C........................................ 4% ........................................ 15

D........................................ 8% ........................................ 10

a. What is the percentage change in the price of each bond if its yield to maturity falls from 6% to 5%?

b. Which of the bonds A-D is most sensitive to a 1% drop in interest rates from 6% to 5% and why? Which bond is least sensitive? Provide an intuitive explanation for your answer.

Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...