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Consider two bonds, both with 8% coupon rates (assume annual coupon payments) one with 10 years...

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Finance

Consider two bonds, both with 8% coupon rates (assumeannual coupon payments) one with 10 years tomaturity and the other with 20 years to maturity. Assume thatcurrent market rates of interest are 8%. Calculate thedifference in the change of the price of the twobonds if interest rates decrease to 6% one year afterpurchasing the bond. Repeat the procedure assumingthat interest rates increase to 10% one year after purchase.Explain the major bond pricing principle that is being illustratedhere

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4.1 Ratings (875 Votes)
Bond A Bond B Lets Par Value p 1000 1000 Coupon Rate annual 8 8 Coupon c 81000 80 81000 80 years to maturity n 10 20 1 If Interest Rater 8 per annum Price of Bond A cr111rn p1rn Price of Bond A 800081110810 100010810 Price of Bond A 10005368 4632    See Answer
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Transcribed Image Text

Consider two bonds, both with 8% coupon rates (assumeannual coupon payments) one with 10 years tomaturity and the other with 20 years to maturity. Assume thatcurrent market rates of interest are 8%. Calculate thedifference in the change of the price of the twobonds if interest rates decrease to 6% one year afterpurchasing the bond. Repeat the procedure assumingthat interest rates increase to 10% one year after purchase.Explain the major bond pricing principle that is being illustratedhere

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