Question
You own two bonds—one with a 5 percent coupon and one with a 6 percent coupon. Which one is more sensitive to interest rate risk, all other things being equal?
Multiple choice question.
Both bonds are equally sensitive.
The bond with the 6 percent coupon rate is more sensitive.
Interest rate risk is not affected by coupon rates.
The bond with the 5 percent coupon rate is more sensitive.
Multiple choice question.
Both bonds are equally sensitive.
The bond with the 6 percent coupon rate is more sensitive.
Interest rate risk is not affected by coupon rates.
The bond with the 5 percent coupon rate is more sensitive.
Answers
GPT-4o mini
The bond with the 5 percent coupon rate is more sensitive to interest rate risk.
Generally, bonds with lower coupon rates are more sensitive to changes in interest rates because they pay less interest over their lifetime, meaning that their cash flows are more heavily discounted by changes in the discount rate (interest rates). Therefore, if interest rates rise, the present value of the lower coupon payments will decrease more significantly compared to a bond with a higher coupon rate.
So the correct answer is: **The bond with the 5 percent coupon rate is more sensitive.**
Generally, bonds with lower coupon rates are more sensitive to changes in interest rates because they pay less interest over their lifetime, meaning that their cash flows are more heavily discounted by changes in the discount rate (interest rates). Therefore, if interest rates rise, the present value of the lower coupon payments will decrease more significantly compared to a bond with a higher coupon rate.
So the correct answer is: **The bond with the 5 percent coupon rate is more sensitive.**