Products & RisksQuestion 46 of 125
Which of the following bonds is generally most sensitive to a given change in interest rates?
a.A short-term, high-coupon bond
b.A long-term, low-coupon (or zero-coupon) bond
c.A bond maturing in 90 days
d.A high-coupon bond maturing in two years
Explanation
Interest rate (price) sensitivity, measured by duration, increases with longer maturities and lower coupons. A long-term, low- or zero-coupon bond has the highest duration and therefore experiences the largest price swing for a given change in market rates.
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