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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?

Answer & Explanation Solved by verified expert
3.9 Ratings (766 Votes)
aBond ABond BCouponPMT40CouponPMT40Number ofsemiannual periodsNper6Number    See Answer
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Transcribed Image Text

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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