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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities

Which of the following bonds is generally most sensitive to a change in interest rates, assuming the same yield and credit quality?

The 10-year bond with a 2% coupon is the most sensitive. Longer maturity and lower coupon both increase duration, so its price moves most when interest rates change, compared with shorter-maturity or higher-coupon bonds.

  1. AA 2-year bond with a 9% coupon
  2. BA 10-year bond with a 9% coupon
  3. CA 10-year bond with a 2% couponCorrect
  4. DA 5-year bond with a 9% coupon

Explanation

Price sensitivity rises with longer maturity and falls with higher coupon. The 10-year, low-coupon bond has the longest duration, so it is the most sensitive. The 10-year 9% bond has lower duration due to its higher coupons.

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