Use the information below for Parts A & B.

Part A:

If the yield curve instantaneously makes a parallel shift up of 1.0%, which statement about the bonds sensitivity to the change in interest rates (i.e. duration) is most accurate?

A) Bond 1 has the greatest sensitivity to the change in interest rates because it increases in value by 4.0%

B) Bond 2 has the greatest sensitivity to the change in interest rates because it increases in value by 4.4%

C) Bond 1 has the greatest sensitivity to the change in interest rates because it decreases in value by 4.4%

D) Bond 2 has the greatest sensitivity to the change in interest rates because it decreases in value by 4.2%

E) Bond 1 has the greatest sensitivity to the change in interest rates because it decreases in value by $41.55

Part B:

Which of the following features could cause Bond 3 to trade at a lower price than Bond 2?

I.Bond 3s longer maturity of 10 years

II.Bond 3s coupon rate of 2.5%

III.Bond 3s annual payment

IV.Bond3s put option at $900

V.Bond 3s high yield credit rating (CCC)

A. I

B. I,II

C. I, II, III

D. I, II, III, IV

E. All of the features

Bond 1: Face Value $1000; Maturity 5 Yrs; PMT/YR: 2, EOP: YTM: 8.0%; Coupon 10.0%; AAA rated Bond 2: Face Value $1000; Maturity 5 Yrs, PMT/YR: 2, EOP: YTM: 8.0%; Coupon 5.0%; AAA rated Bond 3 Face Value $1000, Maturity 10 Yrs, PMT/YR: 1, EOP: YTM: 8.0%; Coupon 2.5%, CCC rated, and puttable at 900 $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 Bond Price (Y-Axis) vs. Yield to Maturity (X-Axis) 1,437.87$1,378.85 s132278 $1,269.48 1,218.80 $1,170.60 $1,124.75 $1,081.11 $1,039.56 $000.00 1,092.22 $1,044.91s1,000.00 $957.35 $916.83 $878.34 $841.75 $806.96 $1,194.61 BOND 1 BOND 2