Both bond A and bond B have 8 percent coupons and are priced at par value. Bond
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Both bond A and bond B have 8 percent coupons and are priced at par value. Bond A has 2 years to maturity, while bond B has 15 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in price of bond A? Of bond B? If rates were to suddenly fall by 2 percent instead, what would the percentage change in price of bond A be now? Of bond B? Illustrate your answers by graphing bond prices versus YTM. What does this problem tell you about the interest rate risk of longer term bonds?
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