Final answer:
The price of the 15-year zero-coupon bond is most sensitive to interest rate changes.
Step-by-step explanation:
The price of a bond is most sensitive to interest rate changes when the bond has a longer maturity and a lower coupon rate. In this case, the bond that is most sensitive to interest rate changes is the A) 15-year zero-coupon bond. This bond has the longest maturity and no coupon payments, making its price more sensitive to changes in interest rates. The price of a bond is most sensitive to interest rate changes when the bond has a longer maturity and lower coupon rate, or no coupon at all. Therefore, among the choices provided, a 20-year zero-coupon bond would be the most sensitive to changes in interest rates. This is because zero-coupon bonds pay no interest until maturity, resulting in a higher duration and thus greater sensitivity to interest rate changes compared to bonds that pay periodic coupons. Additionally, the longer the maturity, the higher the sensitivity to interest rates, as the length of time until the bond's face value is returned is greater. In the scenario where the interest rates have risen, the market value of a bond will decrease below its face value to compensate new investors for the lower yield compared to newer issues at higher rates. For example, the water company's bond issued at 6% would now be less attractive when compared to new bonds offering 9%, hence you would expect to pay less than $10,000 for this bond.