NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Fixed Income Securities (NISM XXI-A)
Among the following bonds with the same maturity and credit quality, which is expected to have the highest price sensitivity to a change in interest rates?
The zero-coupon bond is the most sensitive. With no interim coupons, all cash flow arrives at maturity, giving it the highest duration among bonds of equal maturity, so its price moves most for a given change in interest rates.
- A10% coupon bond
- B8% coupon bond
- CZero-coupon bondCorrect
- DFloating rate bond with periodic reset
Explanation
A zero-coupon bond pays everything at maturity, so its duration equals its maturity and is the longest among bonds of equal maturity. Coupon bonds have lower duration since part of the cash flow arrives earlier. Floating rate bonds reset coupons, so their sensitivity is low.
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