Question
Bond A is a premium bond making semiannual payments. The bond pays a coupon rate of 8.6 percent, has a YTM of 6.8 percent, and
Bond A is a premium bond making semiannual payments. The bond pays a coupon rate of 8.6 percent, has a YTM of 6.8 percent, and has 15 years to maturity. Bond B is a discount bond making semiannual payments. This bond pays a coupon rate of 6.8 percent, has a YTM of 8.6 percent, and also has 15 years to maturity. The bonds have a par value of $1,000. What is the price of each bond today? Calculate the price of both bonds if interest rates fall by 2%, 1%, and increase by 1%, 2% (so that you have 5 different prices for each bond). Please show work with PV formula detail.
Which bond is more sensitive to changes in interest rates? Comment on why (a good answer will have at least 3 sentences explaining the reason).
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