Interest Rate Risk Bond A Bond B? and Bond University

Interest Rate Risk Bond A Bond B?

Bond A and Bond B both have 7 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The A Bond has 2 years to maturity, whereas the B Bond has 15 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? If interest rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of the bonds be then? What does this problem tell you about the interest rate risk of longer term bonds?


Bond best answer:

Answer by Don G
Increase in rate by 2%:
Bond A - Par Value 1,000, N 4, R 4.5%, PMT 35 = PV 964 (3.6%)
Bond B - Par Value 1,000, N 30, R 4.5%, PMT 35 = PV 837 (16.3%)

Decrease in rate by 2%:
Bond A - Par Value 1,000, N 4, R 2.5%, PMT 35 = PV 1,038 (3.8%)
Bond B - Par Value 1,000, N 30, R 2.5%, PMT 35 = PV 1,209 (20.9%)

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