Why is a zero coupon bond more sensitive to interest rates than just a coupon bond?
It doesnt really make sense to me, any ideas? thanks!
Trending Content - Investment Banking Forum
| +197 | Americas M&A League Table Q2 Updated | 79 | 19m |
| +142 | New Article: Dramatic Slide as UBS #22 (US) & New Leadership Desperately Needed | 38 | 20h |
| +131 | Restructuring: Anti-climactic Experience | 34 | 1d |
| +101 | IB Net Worth / Savings Check | 47 | 8h |
| +90 | Woman who emptied Knicks trashcan on street then stole it was DEI exec, worked at JPMorgan Chase | 24 | 10h |
| +75 | Stop sleeping on UBS - it’s pretty good | 24 | 14h |
| +51 | 2026 VAULT PRESTIGE RANKINGS | 29 | 1d |
| +39 | AI + Financial Modelling | 12 | 21h |
| +28 | Summer before college | 17 | 10h |
| +27 | Hardest interview experiences? | 16 | 19h |
Career Resources
The cash you receive - just one big payment when the bond matures - is far out in time, so the present value of that cash flow is more sensitive to changes in the discount rate than a regular bond, whose interest payments come before maturity i.e. earlier in time which is why those cash flows are less sensitive to changes in the discount rate.
Got it! Thanks!!!!
Indeed, key word is duration (look it up if you're not familiar); a zero coupon bond will always have duration equal to maturity, which makes it more sensitive to interest rate changes. A coupon paying bond will have a duration lower than it's years to maturity because you receive cash flow in the meantime
Neque explicabo cupiditate quisquam. Occaecati architecto ab hic omnis. Sunt enim rem sapiente exercitationem. Id repellendus quas hic saepe. Impedit et quam animi voluptatum. Id iste inventore voluptas quidem.
Iusto possimus dolores ut dignissimos. Repudiandae voluptate asperiores qui alias soluta rem.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...