There are two bonds that have identical 7% coupons, make semi-annual payments and are priced at par. Bond A has 4 years to maturity; Bond B has 20 years to maturity.

What are interest rates today?

If interest rates increase by 2%, what will be the new price of the two bonds? What is the percentage change in the prices?

Now assume that interest rates decrease by 2% from where they were originally. Now that are the prices for the two bonds and what are the percentage changes in their prices?

Interest rate risk is a measure of how much a bonds value changes when interest rates change. Which of these bonds has the highest interest rate risk?