Interest rate risk and bond price changes 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 $12\%$ coupon bonds have a YTM of $15\%$ and

will mature in $10$ years. The investment grade bonds have a $10\%$ YTM$,$ mature in $20$ years, and pay a $7\%$ 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?Interest rate risk and bond price changes 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

$1$

$2$

$\%$

$$coupon bonds have a YTM of

$1$

$5$

$\%$

$$and

will mature in

$1$

$0$

$$years$.$ The investment grade bonds have a

$1$

$0$

$\%$

$$YTM

$,$

$$mature in

$2$

$0$

$$years$,$ and pay a

$7$

$\%$

$$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

$$

$$and

$$

$?$

e

$.$

$$Would your answers to parts b through c change if both bonds matured in

$1$

$3$

$$years and paid a

$1$

$2$

$\%$

$$annual

coupon and, if so

$,$

$$how$?$Interest rate risk and bond price changes

$$

$$ Fidelity Music Inc. has an older high yield bond

$$

$($

i

$.$

e

$.$

$$junk

$$

$$bond

$)$

$$issue and a more recent investment grade bond issue.

$$

$$Fidelity$\text{'}$s high yield

$1$

$2$

$$

$\%$

$$coupon bonds have a YTM of

$1$

$5$

$$

$\%$

$$and will mature in

$1$

$0$

$$years$.$ The investment grade bonds have a

$1$

$0$

$$

$\%$

$$

YTM

$,$

$$mature in

$2$

$0$

$$

years

$,$

$$and pay a

$7$

$$

$\%$

$$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

$1$

$3$

$$years and paid a

$$

$1$

$2$

$\%$

$$annual coupon

$$

$$and$,$ if

$$

$$so

$,$

$$how $?$

par value $1,000$