About the interest rate risk of longer-term bonds

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Both Bond Sam and Bond DAve have 6.5% coupons, make semiannual parments and are priced at par value. Bond Sam has 3 years to maturity, whereas Bond Dave has 20 years to maturity. IF interest rates suddenly rise by 2%, what is the % change in the price of Bond Sam? Of Bond Dave? If rates were to suddenly fall by 2% instead of rise, what would the % change of Bond Sam be then? Bond Dave? Illustrate your answers by graphing bond prices versus YTM. What does this problem tell you about the interest rate risk of longer-term bonds?

Reference no: EM13972117

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