Interest rate risk of longer-term bonds

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Both bond Sam and Bond Dave have 7 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 3 years maturity, whereas Bond Dave has 20 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam? Of Bond Dave? If rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Bond Sam be then? Of 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: EM13213878

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