On January 1, 2018, Jennifer Baker started to work as an intern in the fixed-income department

of the Traveler Mutual Funds. Her supervisor, Linda Brown, assigned her to analyze interest rate

risk associated with investment in bonds issued by DTE Energy. Ms. Brown provided Jennifer

with the information about four bonds issued by DTE Energy. The four bonds are named as A, B,

C, and D.

1) Calculate the yield to maturity for the four bonds on January 1, 2018, respectively.

2) Based on the macroeconomic data released by the National Bureau of Economic Research,

Ms. Brown expected that inflation rate will increase by 1%. Hence, she expected that yield to

maturity for the four bonds will increase by 1% too. She asked Jennifer to calculate prices of

the four bonds if the yield to maturity increases by 1%, respectively.

3) List the bond prices of the four bonds on January 1, 2018 and the bond prices of the four

bonds calculated in 2) when the yield to maturity increases by 1% in a table. Jennifer next

calculated the percentage price change of the four bonds.

4) Since Bond A and Bond B have the same coupon rates, Ms. Brown asked Jennifer to

compare which bond price will drop more when the yield to maturity increases by 1%? Since

Bond C and Bond D have the same maturity date, Ms. Brown asked Jennifer to compare

which bond price will drop more when the yield to maturity increases by 1%?

5) Based on the results in 1) through 4), Jennifer needed to report to Linda Brown about which

bonds have higher interest rate risk and why.

Bond A Bond B Bond C Bond D Price on January 1, 2018 122.50 124.50 101.50 106 Annual coupon rate 5.6% 5.6% 1.625% 5.4% Maturity date 12/31/2041 12/31/2037 12/31/2019 12/31/2019 Par value $1,000 $1,000 $1,000 $1,000 Coupon payment frequency Semiannual Semiannual Semiannual Semiannual Rating A A A A