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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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