Both Bond A and Bond B have 3.2% coupons, make semiannual payments, and are priced...
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Both Bond A and Bond B have 3.2% coupons, make semiannual payments, and are priced at par value of $1,000. Bond A has 5 years to maturity, whereas Bond B has 30 years to maturity. If interest rates suddenly rise by 3%, what is the percentage change in the price of Bond A? Of Bond B? If rates were to suddenly fall by 3% instead, what would the percentage change in the price of Bond A be then? Of Bond B? Illustrate your answers by graphing bond prices versus YTM. What does this problem tell you about the interest rate risk of long-term bonds?
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