Consider the following bonds:

Bond	Coupon Rate (annual payments)	Maturity (years)
A	0%	16
B	0%	12
C	4%	16
D	10%	12

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

AD 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.

Note:

Assume annual compounding.

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

6% to 5%?

The percentage change in bond A is ..%. (Round to two decimal places.)

The percentage change in bond B is ..%. (Round to two decimal places.)

The percentage change in bond C is %. (Round to two decimal places.)

The percentage change in bond D is %(Round to two decimal places.)

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

6% to 5%, and why? (Select the best choice below.)

A.Bond A, because it has the lowest coupon and longest maturity.

B.Bond B, because it has the lowest coupon and shortest maturity.

C.Bond C, because it has the shortest maturity and is the coupon bond with the lowest coupon.

D.Bond D, because it has the highest coupon and shortest maturity.

Which of the bonds A through D is least sensitive to a 1% drop in interest rates, from

5% to 6%, and why?(Select the best choice below.

A.Bond A, because it has the lowest coupon and longest maturity.

B.Bond B, because it has the lowest coupon and shortest maturity.

C.Bond C, because it has the shortest maturity and is the coupon bond with the lowest coupon.

D.Bond D, because it has the highest coupon and shortest maturity.