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John Smith and Jane Brody are assistant portfolio managers. The senior portfolio manager has asked them to consider the acquisition of one of two option-free
John Smith and Jane Brody are assistant portfolio managers. The senior portfolio manager has asked them to consider the acquisition of one of two option-free bond issues with the following characteristics: Issue 1 has a lower coupon rate than Issue 2 Issue 1 has a shorter maturity than Issue 2 Both issues have the same credit rating. Smith and Brody are discussing the interest rate risk of the two issues. Smith argues that Issue 1 has greater interest rate risk than Issue 2 because of its lower coupon rate. Brody counters by arguing that Issue 2 has greater interest rate risk because it has a longer maturity than Issue 1. a. Which assistant portfolio manager is correct with respect their selection to the issue with the greater interest rate risk? b. Suppose that you are the senior portfolio manager. How would you suggest that Smith and Brody determine which issue has the greater interest rate risk
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