If two bonds are identical in all respects except their term to maturity, the longer term bond will be more sensitive to changes in interest rates. All else the same, if a bond has a lower coupon rate when compared with another, it will have greater interest rate risk. Therefore, for the option-free bonds, the 10 year 4% coupon is the longest term and has the lowest coupon rate. The call feature does not make a bond more sensitive to changes in interest rates, because it places a ceiling on the maximum price investors will be willing to pay. If interest rates decrease enough the bonds will be called. |
