Consider the following bonds: (Click on the following icon in order to copy its contents into a spreadsheet.) Maturity (years) I 12 a. What is the percentage change in the price of each bond if its yield to maturity falls from 8% to 7%? b. Which of the bonds A through D is the most sensitive to a 1% drop in interest rates from 8% to 7% and why? Which bond is the least sensitive? Provide an intuitive explanation for your answer. Note: Assume annual compounding. Bond A B C D Coupon Rate (annual payments) 0% 0% 2% 8% ... a. What is the percentage change in the price of each bond if its yield to maturity falls from 8% to 7%? The percentage change in bond A is 5.47%. (Round to two decimal places.)

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Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.