Bond A pays $8,000 in 28 years. Bond B pays $8,000 in 14 years. (To keep things
Question:
Bond A pays $8,000 in 28 years. Bond B pays $8,000 in 14 years. (To keep things simple, assume these are zero-coupon bonds, which means the $8,000 is the only payment the bondholder receives.)
Suppose the interest rate is 5 percent.
Using the rule of 70, the value of Bond A is approximately ______, and the value of Bond B is approximately _________.
Now suppose the interest rate increases to 10 percent.
Using the rule of 70, the value of Bond A is now approximately _______, and the value of Bond B is approximately ________.
Comparing each bond's value at 5 percent versus 10 percent, Bond A's value decreases by a ______percentage than Bond B's value.
The value of a bond _______when the interest rate increases, and bonds with a longer time to maturity are ______sensitive to changes in the interest rate.