Consider the following bonds:

Bond Coupon Rate (annual payments) Maturity (years)

A 0% 14

B 0% 10

C 3 % 14

D 11 % 10

a. What is the percentage change in the price of each bond if its yield to maturity falls from 8 % to 7 %?

Bond A:

Bond B:

Bond C:

Bond D:

b. Which of the bonds A minus D is most sensitive to a 1% drop in interest rates from 8 % to 7 % and why? Which bond is least sensitive? Provide an intuitive explanation for your answer. Note : Assume annual compounding.