Consider the following two bonds: a 5-year and a 10-year bond, each with a 7%...
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Finance
Consider the following two bonds: a 5-year and a 10-year bond, each with a 7% coupon. Both bonds currently sell at par and coupon payments are made annually (i.e., one coupon payment per year).
(a) What is the current price of each bond?
Hint: answer does not require calculations; read description of bonds carefully to determine what price must be (10 points) Suppose you buy the 10-year bond. One year later, interest rates decrease to 5%.
(b) What will be the new price of the bond? (30 points)
(c) What rate of return would you have earned on the bond over the one-year period? (20 points)
(d) Which bond will have a higher rate of return over the year, the 5-year bond or the 10-year bond? Why? (5 points).
You dont need calculations for this one and will not be given any points for a numerical answer; respond based on your understanding of interest rate risk (price sensitivity) in bonds.
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