Consider the following bonds: Bond Coupon rate (annual payments) A: 0% B: 0% C: 5% D: 9%
Maturity (years) A: 12 B: 6 C: 12 D:6
(i) What is the percentage change in the price of each bond if its yield to maturity falls from 4% to 3%? (ii) Which of the bonds A-D is most sensitive to a 1% drop in interest rates from 4% to 3% and why? Which bond is least sensitive? Provide an intuitive explanation for your answer.