Question
Amy and Bob are assistant portfolio managers. The senior portfolio manager has asked them to analyse two option-free bonds with the following characteristics:- Bond A
Amy and Bob are assistant portfolio managers. The senior portfolio manager has asked them to analyse two option-free bonds with the following characteristics:-
Bond A has a lower coupon than Bond B
Bond A has a shorter maturity than Bond B
Both issues have the same credit rating
Amy and Bob are discussing the interest rate risk of the two issues. Amy says that Bond A has greater interest rate risk than Bond B because of its lower coupon rate. Bob says that Bond B has greater interest rate risk because it has a longer maturity than Bond A.
Suppose you are the senior portfolio manager. How do you suggest that Amy and Bob should decide which bond has the greater interest rate risk and which person is correct with respect to interest rate risk?
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