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2. Farrier Company has a 7% coupon bond outstanding. Shearer Corp has an 11% coupon bond outstanding. Both bonds have 12 years to maturity, make
2. Farrier Company has a 7% coupon bond outstanding. Shearer Corp has an 11% coupon bond outstanding. Both bonds have 12 years to maturity, make semiannual payments, and have a YTM of 9%. If interest rates suddenly rise by 2%, what is the percentage change in price of these bonds? What if interest rates suddenly fall by 2% instead, what would the percentage change in the price of these bonds be then? Illustrate your answers by graphing bond prices versus YTM. What does the problem tell about about the interest rate risk of longer-term bonds?
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