Question

Which of the following increase the price sensitivity of a bond to changes in interest rates?

1) I. increase in time to maturity
2) II. decrease in time to maturity
3) III. increase in coupon rate
4) IV. decrease in coupon rate

Answer 1

The price sensitivity of a bond to changes in interest rates is influenced by factors such as time to maturity and coupon rate. Increasing the time to maturity or decreasing the coupon rate increases a bond's price sensitivity to interest rate changes, while decreasing the time to maturity or increasing the coupon rate decreases the price sensitivity.

Step-by-step explanation:

The price sensitivity of a bond to changes in interest rates is determined by various factors. In this case, both the time to maturity and the coupon rate affect the price sensitivity of a bond.

1. Increasing the time to maturity (option I) increases the price sensitivity of a bond to changes in interest rates. This means that the bond's price will change more significantly in response to interest rate changes.
2. Decreasing the time to maturity (option II) also increases the price sensitivity of a bond. A bond with a shorter time to maturity will be more affected by changes in interest rates.
3. Increasing the coupon rate (option III) decreases the price sensitivity of a bond to changes in interest rates. Bonds with higher coupon rates will have a lower price sensitivity to interest rate changes.
4. Decreasing the coupon rate (option IV) increases the price sensitivity of a bond to interest rate changes. Bonds with lower coupon rates will be more affected by changes in interest rates.