Question
You are considering issuing two types of bonds. The current yield to maturity on similar bonds is 4% annually. Both bonds have a face value
You are considering issuing two types of bonds. The current yield to maturity on similar bonds is 4% annually. Both bonds have a face value of $1000 and will pay annual coupons. Bond A has a maturity of 10 years and bond B has a maturity of 20 years. You want to compute the price of both bonds at the prevailing interest rate and see what happens to the price of the bonds as the interest rate changes. You should consider a range of interest rates starting in 2 % and ending in 7%, with increments of 0.1%. Calculate the price of both bonds at each interest rate and plot the bond prices against the interest rate. What do your results indicate about the interest rate risk of bonds with longer time to maturity?
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