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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%
Time to maturity (years): 4
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?
American Investment Management Services in Week 9 before beginning the final exam. Then answer the following questions.
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