Final answer:
Zero-coupon bonds are the most sensitive to changes in interest rates because they do not pay periodic interest and their price is entirely based on the present value of their single future payment.
Step-by-step explanation:
The bond that is most sensitive to changes in interest rates is the zero-coupon bond. Zero-coupon bonds do not pay periodic interest payments, which means their value is solely determined by discounting the single payment they make at maturity. Therefore, the price of a zero-coupon bond will be more affected by interest rate fluctuations than bonds with periodic coupons, like corporate bonds, municipal bonds, and Treasury bonds.
While corporate bonds and Treasury bonds may see their interest rates rise and fall together, corporate bonds typically offer higher interest rates to compensate for the greater risk of default compared to the U.S. government. Municipal bonds, on the other hand, often have lower interest rates due to the tax-exempt status of their interest payments, making them somewhat different in how they respond to interest rate changes. None of these, however, are as sensitive to interest rate movements as zero-coupon bonds.