There are two companies named AA and BB. Company AA has a 5-year, 4% annual coupon bond with a $100 par value. BB has a 20-year, 3% annual coupon bond with a $100 par value. Both bonds currently have a yield to maturity of 2.5%.

Answer the following questions:

a. By how much do you think the price of each bond will change if interest rates suddenly fall by 2 percentage point (e.g from 3% to 1%)?

b. By how much do you think the price of each bond will change if interest rates suddenly increase by 3 percentage points?

c. Considering the price sensitivity of the five-year bond relative to the 20-year bond, what can you conclude?