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Consider the two bonds described below: 20 Bond A Bond B Maturity (years) 15 Coupon rate (%) (paid annually) 10 0 Par value $1,000 $1,000
Consider the two bonds described below: 20 Bond A Bond B Maturity (years) 15 Coupon rate (%) (paid annually) 10 0 Par value $1,000 $1,000 Both bonds currently have a required return (i.e., yield to maturity) of 8%. Suppose that, in 2 years, the required return (yield to maturity) of these bonds increases to 10%. Which security shows the highest sensitivity to the change in the interest rate? In solving this problem please do the following: 1) write down your calculator inputs or the formulas that you are using, 2) solve for the value of bonds before (that is, now) and after (that is, in 2 years) the rate increase, 3) compute the change in price of both bonds in percentage terms, and 4) decide which security shows the highest sensitivity to interest rates and explain why. N:B: Show your work. If needed, equations can be written by using the tool bar shown right above the answer text box
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