Consider two 10-year coupon bonds with coupon rates of 5% and 7%, respectively. Assume that the coupons are paid once a year. Both bonds are callable at 1100.

Currently, both bonds are priced with a YTM of 6%. What will be the price change on each bond if the yield suddenly falls to 5%?

The bonds will be called immediately when the present value exceeds the call price.

Price change on 5% coupon bond:

Price change on 7% coupon bond: