Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:Illustrate your answers by graphing bond prices versus time to
LO 2
19. Interest Rate Risk Both Bond Bill and Bond Ted have 5.8 percent coupons,
make semiannual payments, and are priced at par value. Bond Bill has 5
years to maturity, whereas Bond Ted has 25 years to maturity. If interest
rates suddenly rise by 2 percent, what is the percentage change in the price
of Bond Bill? Of Bond Ted? Both bonds have a par value of $1,000. If rates
were to suddenly fall by 2 percent instead, what would the percentage change
in the price of Bond Bill be then? Of Bond Ted? Illustrate your answers by
graphing bond prices versus YTM. What does this problem tell you about
the interest rate risk of longer-term bonds?
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