Question

Consider two 10% coupon paying bonds (A and B) with $1,000 face value each, issued by the same corporation at the same time. Bond A matures in 1 years and Bond B matures in 10 years. Which of the bonds is less sensitive to interest rate risk?

a. Not enough information to make a conclusion.
b. Both bonds are equally sensitive to interest rate risk.
c. Bond A.
d. Bond B.

Answer 1

Bond A is less sensitive to interest rate risk compared to Bond B due to its shorter maturity period of 1 year.

Step-by-step explanation:

Bond A would be less sensitive to interest rate risk compared to Bond B. This is because Bond A has a shorter maturity period of 1 year, while Bond B has a longer maturity period of 10 years. When interest rates rise, bond prices generally decrease. Therefore, since Bond A has a shorter time remaining until maturity, its price would be less affected by changes in interest rates compared to Bond B.