20. Interest Rate Risk [LO2] Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bonds have 14 years to maturity, make semiannual payments, and have a YTM of 6 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? What if rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of lower-coupon bonds? Bond J: Coupon rate 3% Initial yield to maturity 6% Settlement date 1/1/2000 Maturity date 1/1/2014 Face value 1,000 # of coupons per year 2 Bond K: Coupon rate 9% Initial yield to maturity 6% Settlement date 1/1/2000 Maturity date 1/1/2014 Face value 1,000 # of coupons per year 2 Change in interest rate 2% Initial price of Bond J Price after change Initial price of Bond K Price after change % change in Bond J % change in Bond K All else same, the lower the coupon rate of the bond, the greater is its price sensitivity to changes in interest rates.