John Williams is considering investing in a bond issued by ABC Corp. The bond has 6% semi-annual coupon and matures on December 31^st 2030. Johns research indicated that required rate of return on this bond should be around 3.85%. Another bond (issued by XYZ corp) John is interested in has 5% semi-annual coupon interest and matures on December 31^st 2025. John thinks that 3.6% required return is consistent with the XYC Corps default risk. John is concerned about a Fed rate hike; he is expecting a 1% (100bp) increase in interest rates due to the Fed action,but he thinks that default risks will not be altered with 100bp interest increase in both cases.

a. Which bond has higher price sensitivity given Johns rate increase expectations?

b. Assuming that bonds have $1,000 face value and John is willing to invest $100,000 in the less

volatile bond, what would be prospective loss John would incur if interest rates increased by 1%.

c. What would happen, if the interest rated droppby by 1%.

HINT: Use duration to evaluate the risk of each bond; calculate duration by using McCauley and Modified duration formulas and Excel Function. Use March 20 2018 as the settlement date for the bond; both bond pays coupon interest on June 30^th and December 31^st. You can calculate the bond prices by using PRICE function in Excel.