Using the following information to answer the following questions? Both Bond A and Bond B have 8...

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Finance

Using the following information to answer the followingquestions?
Both Bond A and Bond B have 8 percent coupons, make semiannualpayments, and are priced at par value. Bond A has 3 years tomaturity, whereas Bond B has 20 years to maturity.
a. If interest rates suddenly rise by 2 percent annually (to 10%annually right now), what would be the percentage changes in theprices of Bond A and Bond B?
b. If rates were to suddenly drop by 2 percent instead (to 6%right now), what would be the percentage changes in the prices ofBond A and Bond B?
c. What does this problem tell you about the interest rate riskof long-term bonds?

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4.3 Ratings (694 Votes)

Bond A Let Par Value 1000 Coupon 810002 40 Number of Periods 23 6 Price 1000 Bond B Number of Periods 21020 a New YTM 82 10 Semi annual YTM 5 New Price of Bond See Answer

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Using the following information to answer the followingquestions?Both Bond A and Bond B have 8 percent coupons, make semiannualpayments, and are priced at par value. Bond A has 3 years tomaturity, whereas Bond B has 20 years to maturity.a. If interest rates suddenly rise by 2 percent annually (to 10%annually right now), what would be the percentage changes in theprices of Bond A and Bond B?b. If rates were to suddenly drop by 2 percent instead (to 6%right now), what would be the percentage changes in the prices ofBond A and Bond B?c. What does this problem tell you about the interest rate riskof long-term bonds?