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Consider the following bonds: Bond Coupon Rate (annual payments) Maturity (years) A 0% 17 B 0% 8 C 6 % 17 D 11 % 8

Consider the following bonds:

Bond Coupon Rate (annual payments) Maturity (years)

A 0% 17

B 0% 8

C 6 % 17

D 11 % 8

a. What is the percentage change in the price of each bond if its yield to maturity falls from 5 % to 4 %?

b. Which of the bonds A - D is most sensitive to a 1% drop in interest rates from 5 % to 4 % and why? Which bond is least sensitive? Provide an intuitive explanation for your answer.

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