Question

Consider a 12 -year 5.5% coupon bond and a nine-year 7.5% coupon bond. Without making any calculations, which bond do you believe is more sensitive to interest rate changes? Explain.

Answer 1

Bonds with longer terms and lower coupon rates are more sensitive to interest rate changes.

Step-by-step explanation:

Bonds are financial instruments that represent a loan made by an investor to a borrower, typically a government or corporation. The interest rate on a bond, also known as the coupon rate, is used to determine the periodic interest payments the bondholder will receive.

In general, longer-term bonds with lower coupon rates are more sensitive to interest rate changes compared to shorter-term bonds with higher coupon rates. This is because longer-term bonds expose investors to interest rate risk for a longer period of time, meaning their value is more affected by changes in interest rates.

Based on this information, the 12-year 5.5% coupon bond would be more sensitive to interest rate changes compared to the nine-year 7.5% coupon bond.