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How sensitive bonds price is to interest rate movements

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Reference no: EM131510785

Calculate the price for each bond below when the market interest rate is 9 percent and when the market interest rate is 10 percent and put the result in a table format. Hint: zero coupon bonds have only one cash inflow ($1,000 at the end of the bond’s life and yet are discounted on a semiannual basis).

A 7-year bond with a 9 percent coupon rate

A 7-year bond with a zero percent coupon rate

A 15-year bond with a 9 percent coupon rate

A 15-year bond with a zero percent coupon rate

Calculate the percentage change in price for each bond when the market interest rate went from nine percent to ten percent. Input these results into your table.

What two factors determined how sensitive a bond’s price is to interest rate movements? Describe the relationship between each factor and bond price movement (e.g., are they inversely related, directly related or perhaps there is no discernable relationship-explain).

Which bond had the most interest rate risk and why?

Rank all four bonds in order from most interest rate risk to the least interest rate risk.

Reference no: EM131510785

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