Final answer:
When a bond's coupon rate is higher than the yield to maturity, it will trade at a discount. The bond with the longest duration will have the greatest price sensitivity to changes in interest rates.
Step-by-step explanation:
When a bond's coupon rate is higher than the yield to maturity, it will trade at a discount.
This is because the coupon rate is the fixed interest rate that the bond pays to its holders, while the yield to maturity takes into account the current market interest rate.
If the coupon rate is higher, it means the bond pays more interest than what investors can get from other investments at the market rate, making it less attractive and thus trading at a discount.
The price sensitivity of a bond to changes in interest rates is measured by its duration.
The longer the duration, the greater the price sensitivity.
Therefore, the bond with the longest duration will have the greatest price sensitivity to changes in interest rates.