Which of the following bonds will be least sensitive to a change in interest rat

Question

Which of the following bonds will be least sensitive to a change in interest rates?

A.

a

tenminus

year

bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually

B.

a

20minus

year

bond with a $3,000 face value whose yield to maturity is 6.0% and coupon rate is 5.4% APR paid semiannually

C.

a

15minus

year

bond with a $5,000 face value whose yield to maturity is 7.4% and coupon rate is 6.2% APR paid annually

D.

a

30minus

year

bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually

Explanation / Answer

Sensitivity to interest rate changes has direct relation to the maturity of the bond. Higher the maturity, more sensitive the bond is to the changes in interest rates.

So for a bond to be least sensitive to changes in interest rates, it must have minimum maturity, and out of the options given, option A would do the justice, with maturity of 10 years

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