This problem investigates the sensitivity of the prices of bonds carrying differing coupon rates to interest rate changes. Bonds K and L both have a face value of $1000 and 15 years remaining until maturity. Their coupon rates are 6% and 8%, respectively. If the prevailing market rate decreases from 7.5% to 6.5% compounded semiannually, calculate the price change of each bond:
a) In dollars.
b) As a percentage of the initial price.
c) Are high-coupon or low-coupon bonds more sensitive to a given interest rate change? Justify your response using the results from part b.

Question

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The Answer of This problem investigates the sensitivity of the prices of bonds carrying differing coupon rates to interest rate changes. Bonds K and L both have a face value of $1000 and 15 years remaining until maturity. Their coupon rates are 6% and 8%, respectively. If the prevailing market rate decreases from 7.5% to 6.5% compounded semiannually, calculate the price change of each bond:
a) In dollars.
b) As a percentage of the initial price.
c) Are high-coupon or low-coupon bonds more sensitive to a given interest rate change? Justify your response using the results from part b.

This Problem Investigates the Sensitivity of the Prices of Bonds