Question
Bond A has the following: 20 years left to maturity 7.5% Coupon Rate Semiannual payments Bond B has the following: 5 years left till maturity
Bond A has the following: 20 years left to maturity 7.5% Coupon Rate Semiannual payments Bond B has the following: 5 years left till maturity 7.5% Coupon Rate Semiannual payments Both bonds are similar to each other in all other features and risk. If the current market rate of interest suddenly drops from 7% to 5%, which of these bonds will change more in value? Please show calculations of each bond valuation at 7% as well as 5% and compute percentage change in price to arrive at your answer. Also include a short paragraph explaining two kinds of interest rate risk. Thank you very much!
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