Question

Which one of the following bonds is the least sensitive to interest rate risk?

1) 3-year; 4 percent coupon
2) 3-year; 6 percent coupon
3) 5-year; 6 percent coupon
4) 7-year; 6 percent coupon
5) 7-year; 4 percent coupon

Answer 1

The 3-year; 6 percent coupon bond is the least sensitive to interest rate risk. Hence, the correct answer is option 2.

Step-by-step explanation:

In this scenario, the bond that is least sensitive to interest rate risk is the 3-year; 6 percent coupon bond. The sensitivity to interest rate risk is determined by the bond's duration. Duration measures the bond's price sensitivity to changes in interest rates.

Generally, lower coupon bonds have higher durations, meaning they are more sensitive to interest rate changes. In this case, the 3-year; 6 percent coupon bond has a higher coupon rate and a shorter maturity, resulting in a lower duration compared to the other options. Therefore, it is the least sensitive to interest rate risk.