The Fantastic Seven Corp. has a bond with a coupon rate of 6 percent outstanding. The Great Giant Company has a bond with a coupon rate of 12 percent outstanding.

Both bonds have l4 years to maturity, make semi-annual payments, and have a YTM of 9 percent.

a.If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds?

b.What if interest rates suddenly fall by 2 percent instead?

c. What does this problem and numbers derived here tell you about the interest rate risk of lower coupon bonds? Discuss by referring to some specific investment principle.