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Suppose interest rates increase from 4% to 5%. Between a 30-year bond paying an annual coupon of 4% or a 5-year bond paying an annual
Suppose interest rates increase from 4% to 5%. Between a 30-year bond paying an annual coupon of 4% or a 5-year bond paying an annual coupon of 4%, which of the two bonds will suffer the greater percentage decline in value? Why does this bond have greater interest rate risk? (Assume both bonds have equal credit risk.)
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