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Calculate the actual price of the bonds

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Reference no: EM132412339

Consider the following two bonds (assume annual coupons):

Bond A

Coupon: 9%

YTM (years): 10%

Time to maturity (years): 2

Par value: 1000 dollar

Price: 982.595 dollar

Bond B

Coupon: 10%

YTM (years): 10%

Time to maturity (years): 4

Par value: 1000 dollar

Price: 1000 dollar

a) Calculate the actual price of the bonds for a 100 basis point (i.e. 1%) increase in interest rates.

b) Using modified duration, estimate the price of the bonds for a 100 basis point increase in interest rates.

c) Would the same change of interest rates but in the opposite direction produce the same magnitude of change in bond prices? Comment! (No calculations are required).

d) For a bond investor interested in price appreciation, which bond would you recommend? Why?

Reference no: EM132412339

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