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Why are the bonds prices different

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Reference no: EM132466202

Bond A Bond B Bond C

Face Value 1000 1000 1000

Coupon rate 12 15 8

Yield to Maturity 11% 11% 11%

Years left to Maturity 15 10 9

Annual or Semi-Annual Annual Annual Annual

You have been hired as a financial analyst. Your client has the choice between buying one of the bonds listed in the table above.

1. Compute the price of each bond. Why are the bonds' prices different?

2. Compute the duration for each bond. What is the meaning of the duration result for each bond?

3. Analysts have predicted that in 3 months real interest rates will be 4% and that expected inflation will be 6.5%. Use the duration for each bond to help you to compute the expected percentage change in each price due to the change in the prevailing market interest rates in 3 months. Which bond will be more sensitive to the change in interest rates?

Reference no: EM132466202

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