You own two bonds.Both bonds pay annual interest,have 6 percent annual coupons,$1,000 face values,and currently have 6 percent yields to maturity.Bond A has 12 years to maturity and Bond B has 4 years to maturity.If the market rate of interest rises unexpectedly to 7 percent,Bond _____ will be the most volatile with a price decrease of _____ percent.

Question

Quizplus · Accepted Answer

Both bonds have a starting price of $1,000 since their coupon rates are equal to their yields to maturity. Percentage price change of Bond A = ($920.57 - $1,000)/$1,000 = -7.94 percent Percentage price change of Bond B = ($966.13 - $1,000)/$1,000 = -3.39 percent

You Own Two Bonds