Answered: What will be the change in price for…

What will be the change in price for each of the bonds? Does this tell us anything about the relationship between time to maturity and interest rate risk?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 10P

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Question

EZ Marketing Inc., has two bond issues outstanding, each with a par value of $1,000. Information about each is listed below. Suppose market interest rise 2 percentage point across the yield curve. What will be the change in price for each of the bonds? Does this tell us anything about the relationship between time to maturity and interest rate risk? (Bonds make annual coupon payments)

Bond A: 5 years to maturity, 8 % coupon, market interest rate is 9 percent.

Bond B: 12 years to maturity, 8% coupon, market interest rate is 9 percent.

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