Part $2$:

As an MBA student, you are curious about the inverse relationship between bond prices and interest rate.

More specifically, you want to figure out how interest rate sensitivity affects bonds of varying maturities. So$,$

you decide to analyze two bond issues: Bond S and Bond L$.$ Both bond S and Bond L have $8\%$ coupons, make

semiannual payments, and are priced at par value $($meaning their PV is $$1000).$ Bond S matures in $3$ years,

whereas Bond L matures in $20$ years. Given this information:

a$.$ If interest rates suddenly rise by $3\%,$ what is the percentage change in the price in both bonds S and

L$?(20$ points$)$

b$.$ If rates suddenly fall by $3\%$ instead, what would the percentage change in the price of both bond S

and L$?(20$ points$)$

c$.$ What does this problem tell you about the interest rate risk of long$-$term bonds? $(10$ points$)$Bond Price Quotes: