Suppose both Bond Bob and Bond Tom have 8 percent coupons, make semiannual payments, and are priced at par value. Bond Bob has 2 years to maturity, whereas Bond Tom has 15 years to maturity.

Required:

a) If interest rates suddenly rise by 2 percent, what is the percentage change in the price of

Bond Bob?Of Bond Tom?

b) If rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Bond Bob be then? Of Bond Tom?

c) What does this problem tell you about the interest rate risk of longer-term bonds?