Question
Both Bond Sara and Bond Carl have 7 percent coupons, make semiannual payments and are priced at par (HINT: $1,000.00). Bond Sara has 3 years
Both Bond Sara and Bond Carl have 7 percent coupons, make semiannual payments and are priced at par (HINT: $1,000.00). Bond Sara has 3 years to maturity, whereas Bond Carl has 20 years to maturity.
a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sara? Of Bond Carl?
b. If instead interest rates suddenly fall by 2 percentage points, what is the percentage change in the price of Bond Sara? Of Bond Carl?
c. What does this tell you about the price sensitivity of the two bonds to interest rate changes?
d. What does this problem tell you about the interest rate risk of longer-term bonds?
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Bakers Health Care Finance Basic Tools For Nonfinancial Managers
Authors: Thomas K. Ross
6th Edition
1284233162, 978-1284233162
