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    Question

    Bond A: 10-year zero coupon. Bond B: 10-year 8% coupon.

    Rates increase by 1%. Which holds more value drop?
    A Bond B Correct Answer Incorrect Answer
    B Bond A Correct Answer Incorrect Answer
    C Equal Correct Answer Incorrect Answer
    D Depends on credit quality Correct Answer Incorrect Answer
    E Insufficient info Correct Answer Incorrect Answer

    Solution

    Zero-coupon bonds lack intermediate cash flows, thus have higher duration and greater price sensitivity to interest rate changes.

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