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Which of the following bonds is most sensitive to movements in interest rates? Assume all bonds have the same face value. a. 1-month bill of exchange b. 10-year zero coupon bond. c. 5-year coupon paying bond d. 1-year zero coupon bond e. 10-year coupon paying par bond

Question

Which of the following bonds is most sensitive to movements in interest rates? Assume all bonds have the same face value.

a. 1-month bill of exchange

b. 10-year zero coupon bond.

c. 5-year coupon paying bond

d. 1-year zero coupon bond

e. 10-year coupon paying par bond

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Solution

The correct answer is b. 10-year zero coupon bond.

Here's the step-by-step explanation:

  1. The sensitivity of a bond to movements in interest rates is measured by its duration. The longer the duration of a bond, the more sensitive it is to changes in interest rates.

  2. A zero coupon bond's duration is equal to its time to maturity. Therefore, a

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