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Asea Brown Boveri (ABB Group) Bond has a coupon rate of 4%. Caterpillar Bond has a coupon rate of 14%. Both bonds have 18 years
Asea Brown Boveri (ABB Group) Bond has a coupon rate of 4%. Caterpillar Bond has a coupon rate of 14%. Both bonds have 18 years to maturity, a par value of $1,000 and a YTM of 8% and both make semiannual payments. If interest rates suddenly rise by 2%, what is the percentage change in the price of these bonds? Instead, if rates suddenly fall by 4%, what is the percentage change in the price of these bonds? As interest rates fall by 4%, which of the two bonds would you prefer to own. Explain briefly, why?
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