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Question 2 (60 points): Bonds and Interest Rate Risk (15 minutes) Suppose you purchase a $1000 Face-Value Zero-Coupon Bond with maturity 30 years and yield
Question 2 (60 points): Bonds and Interest Rate Risk (15 minutes) Suppose you purchase a $1000 Face-Value Zero-Coupon Bond with maturity 30 years and yield to maturity 4% quoted with annual compounding. a) Show the bond cash flows on a time line and compute the current price of the bond b) Draw a graph to illustrate how the price of this bond will change as it gets closer to maturity - Price (on y axis) vs Time (on x axis). - c) Why is a zero-coupon bond more sensitive to interest rate changes than similar coupon bearing bonds (2 or 3 sentences)
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