An investor is comparing Bond A (10% coupon) and Bond B (2% coupon). Both have a $1,000 par value and mature in exactly 5 years. Based on their cash flow profiles, how will these bonds react to a general rise in market interest rates?

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Accepted Answer

Low coupon bonds (Bond B) have higher duration and are more sensitive to rate changes because more of their total cash flow is weighted toward the final maturity payment.

An investor is comparing Bond A (10% coupon) and Bond B (2% coupon). Both have a $1,000 par value and mature in exactly 5 years. Based on their cash flow profiles, how will these bonds react to a general rise in market interest rates?

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