Both Bond Bill and Bond Ted have 5.8 percent coupons,make semiannual payments, and are priced at par value. Bond Bill has 5years to maturity, whereas Bond Ted has 25 years to maturity.

If interestrates suddenly rise by 2 percent, what is the percentage change in the priceof Bond Bill? Of Bond Ted?

Both bonds have a par value of $1,000. If rateswere to suddenly fall by 2 percent instead, what would the percentage changein the price of Bond Bill be then? Of Bond Ted?

Illustrate your answers bygraphing bond prices versus YTM. What does this problem tell you aboutthe interest rate risk of longer-term bonds?