Consider two recent bond issues by Microsoft: both have face values of $1,000 and coupon rates of 10% but one bond (call it the short bond)has five years to maturity and the other,the long bond,has twenty years to maturity.Assume that yields fall from 15% to 5%.Which bond will experience a greater price increase,and by how much?

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P_bond = C × 11ea7fdb_fc02_d21a_a768_19f0fb7cc410_TB2902_11 + 11ea7fdb_fc02_d21b_a768_994ff6046d88_TB2902_11 P_{long 5%} = 100 × 11ea7fdb_fc02_d21c_a768_273691f7aade_TB2902_11 + 11ea7fdb_fc02_d21d_a768_05bd2415d1e7_TB2902_11 = $1,623.11 P_{long 15%} = 100 × 11ea7fdb_fc02_f92e_a768_277eff927cd5_TB2902_11 + 11ea7fdb_fc02_f92f_a768_cf2d0d4d0cbe_TB2902_11 = $687.03 Change in the long bond's price = 1,623.11 - 687.03 = $936.08 P_{short 5%} = 100 × 11ea7fdb_fc02_f930_a768_f1e7b123fff9_TB2902_11 + 11ea7fdb_fc02_f931_a768_514dda508ba7_TB2902_11 = $1,216.47 P_{short 15%} = 100 × 11ea7fdb_fc02_f932_a768_753939fdc82a_TB2902_11 + 11ea7fdb_fc02_f933_a768_575bfc0e4949_TB2902_11 = $832.39 Change in the short bond's price = 1,216.47 - 832.39 = $384.08

Consider Two Recent Bond Issues by Microsoft: Both Have Face