Question
5. Bond A and bond B have par values of $1,000. They both have coupon rates of 12%, and they both pay annual interest. Bond
5. Bond A and bond B have par values of $1,000. They both have coupon rates of 12%, and they both pay annual interest. Bond A has 15 years left to maturity and bond B has 5 years left to maturity. a. Which bond would have a higher level of price risk? Why? b. Which bond would have a higher level of reinvestment risk? Why? c. If YTM is higher than the coupon rate, will the bonds sell at a discount or at a premium? d. If YTM is higher than the coupon rate, which bond will have a greater discount or premium? Explain why. e. What would you expect to happen to the price of each bond as we approach its maturity?
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