Question
Laurel Inc. and Hardy Corp. both just issued 10-year coupon bonds, with semiannual interest payments, and both are currently priced at the par value of
Laurel Inc. and Hardy Corp. both just issued 10-year coupon bonds, with semiannual interest payments, and both are currently priced at the par value of $1,000. The Laurel Inc. bond has a coupon rate of 3%, whereas the Hardy Corp. bond has a coupon rate of 8%.
(a) If yields suddenly rise by 2% for both bonds, what are the percentage changes in the bond prices?
(b) If yields suddenly fall by 2% for both bonds, what are the percentage changes in the bond prices?
(c) What does this problem tell you about the relationship between coupon rate and the interest rate risk? Explain the intuitions.
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