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Maturity of bond to sensitivity of bond price

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The parent company of the HighLife CBD chain has two bonds outstanding, both of which have a 9% annual coupon rate paying semi-annually. The market interest rate, following the bond equivalent yield convention, is also currently 9% per year. The first bond, Bond A, has four years to maturity. The second bond, Bond B, has eight years to maturity. What is the value of each bond as a percentage of par? If market interest rates were to rise to 11% per year following some rumors of new regulation of recreational cannabis use:

a. Re-calculate the price for each bond. (You can assume maturities are the same as before.)

b. What do the changes in price show about the relation between bond prices and interest rates?

c. What do the changes in price show about the role of the time to maturity of the bond to the sensitivity of bond price to changes in interest rates?

Reference no: EM133206228

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