Today is March1, 2006. Consider the following two (semi-annual coupon) bonds:

 Bond A Bond B 

Maturity DateMarch 1, 2012March 1, 2013

Coupon Rate4%12%

Current Price$948.71 $1,273.01

(a)What is the YTM on each bond?

Assume that the YTM on Bond A changes to 6%:

(bi) What is the new price of Bond A?

(bii) What is the capital gain yield on Bond A?

Now Assume that the YTM on Bond A changes to 4%:

(biii) What is the new price of Bond A?

(biv) What is the capital gain yield on Bond A?

Assume that the YTM on Bond B changes to 8%:

(ci) What is the new price of Bond B?

(cii) What is the capital gain yield on Bond B?

Now Assume that the YTM on Bond B changes to 6%:

(ciii) What is the new price of Bond B?

(civ) What is the capital gain yield on Bond B?

(d) Which bond has more interest rate risk? How do you know?

(e) Which bond has the longer maturity?

(f) Is it always true that longer-term bonds have more interest rate risk?