a. If interest rates go up by 1%, what will be the % Change in the market value for each Bond's Price for the two Bonds in Problem #1?
b. Which of the 2 bonds has more price risk, and has more reinvestment risk? Explain why.

Question

Quizplus · Accepted Answer

The Answer is % Change in Price for Bond 1 __-4.45%___
% Change in Price for Bond 2 _-4.48%___
Calculation:
% Change in - Modified Duration x Change in Rate
Bond 1 % Change = -4.45(.01) = 0.0445 or- 4.45%
Bond 2 % Change = -4.81(.01) = -.0448 or -4.48%
B. Bond 1 has coupon payments, so has more reinvestment risk.
Bond 2 has more price risk, with a higher Modified Duration than Bond 1, so has higher risk of a capital loss if it has to be sold prior to maturity.

A If Interest Rates Go Up by 1%, What Will