Question
Both bond X and bond Y have 5.8% coupons, make semiannual payments, and are priced at par value. Bond X has five years to maturity,
Both bond X and bond Y have 5.8% coupons, make semiannual payments, and are priced at par value. Bond X has five years to maturity, whereas Bon Y has 25 years to maturity. If interest rates suddenly rise by 2%, what is the percentage change in the price of bond X? Of bond Y? Both bonds have a par value of $1000. If rates were suddenly to fall by 2% instead, what would the percentage change in the price of bond X be then? Of bond Y? Illustrate your answer by graphing the bond prices versus yield to maturity. What does this problem tell you about interest rate risk of longer-term bonds?
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