Q.1. Interest rate risk

Both Bond Sam and Bond Dave have 7.3% coupons, make semi-annual payments and are priced at face value. Bond Sam has 3 years to maturity, whereas Bond Dave has 20 years to maturity. If the interest rates suddenly rise by 2%, what is the % change in the price of Bond Sam? Of Bond Dave? Of rates were to suddenly fall by 2% instead, what would the percentage change in the price of Bond Sam be then? Of Bond Dave? Illustrate your answer by graphing bond price versus YTM. What does this problem tell you about the interest risk of longer-term bonds?

Q.3. Bond Yield

Woolgoolga Wool company wants to issue new 20 years bond for some much needed expansion projects. The company currently has 6% coupon bonds on the market that sell for $1083, make semi-annual payments and mature in 20 years. What coupon rate should the company set on its new bonds if it wants them to sell at face value?