Consider the following bonds: Bond A B D Coupon Rate (annual payments) 0% 0% 2%...
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Consider the following bonds: Bond A B с D Coupon Rate (annual payments) 0% 0% 2% 8% Maturity (years) 13 12 13 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. Consider the following bonds: Bond A B с D Coupon Rate (annual payments) 0% 0% 2% 8% Maturity (years) 13 12 13 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.
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Answer a The percentage change in the price of each bond can be calculated using the formula P P YTMnew YTMold YTMold where P is the current price of ... View the full answer
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