Bond Coupon Rate (annual payments) (%) Maturity (years) A 0 17 B 0 12 C 3 17 D 10 12

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

8%

to

7%?

b. Which of the bonds A through D is the most sensitive to a 1% drop in interest rates from

8%

to

7%

and why? Which bond is the least sensitive? Provide an intuitive explanation for your answer.

Note:

Assume annual compounding.