Fidelity Music Inc. has an older high yield bond (i.e. junk bond) issue and a more recent investment grade bond issue. Fidelity's high yield 11% coupon bonds have a YTM of 14% and will mature in 8 years. The investment grade bonds have a 8% YTM, mature in 22 years, and pay a 5% annual coupon. As a bond investor you would like to evaluate the bond price sensitivity to underlying interest rate fluctuations for both Fidelity Music bond issues.

a.What is the current price of both bonds?

b. What will be the percentage change in bond price for both bonds if the underlying interest rates increase by 2%? Which bond has more price sensitivity to interest rate risk?

c.Alternatively, what will be the percentage change in bond price for both bonds if the underlying interest rates decrease by 2%? Which bond has more price sensitivity to interest rate risk?

d.What conclusions do you draw from comparing your answers to parts b and c?

e.Would your answers to parts b through c change if both bonds matured in 13 years and paid a 12% annual coupon and, if so, how?

Part 1

The current price of the high yield bond is $? (Round to the nearest cent.)

Part 2

The current price of the investment grade bond is $? (Round to the nearest cent.)

Part 3

The current price of the high yield bond if the underlying interest rate increases by 2% is $?. (Round to the nearest cent.)

Part 4

The percentage change in bond price for the high yield bond if the underlying interest rate increases by 2% is ?(Round to two decimal places.)

Part 5

The current price of the investment grade bond if the underlying interest rate increases by 2% is

?$ (Round to the nearest cent.)

Part 6

The percentage change in bond price for the investment grade bond if the underlying interest rate increases by 2% is ? (Round to two decimal places.)

Part 8

c. The current price of the high yield bond if the underlying interest rate decreases by 2% is

$?.

(Round to the nearest cent.)

Part 9

The percentage change in bond price for the high yield bond if the underlying interest rate decreases by 2% is ?%. (Round to two decimal places.)

Part 10

The current price of the investment grade bond if the underlying interest rate decreases by 2% is

$? (Round to the nearest cent.)

Part 11

The percentage change in bond price for the investment grade bond if the underlying interest rate decreases by 2% is ?%. (Round to two decimal places.)

thank you so much.