Consider the following two bonds with the same yield-to-maturity (YTM) of 6%: Bond A is a 15-year,
Question:
Consider the following two bonds with the same yield-to-maturity (YTM) of 6%: Bond A is a 15-year, 25% coupon bond, and bond B is a 5-year, 5% coupon bond.
1. Calculate the prices for both bonds.
2. Calculate the duration measure for both bonds as of now
3. What are the prices for the bonds next year, if everything remains the same?
4. Based on the durations calculated in (2), what would the prices of these bonds be if the YTM decreases to 5% in the next year
5. Calculate the prices of these bonds if the YTM decreases to 5% in the next year, everything else being the same. (Hint: calculate the price for next year with YTM = 5%)
6. Which of the two bonds, based on your previous answers, is the most sensitive to a change in the interest rate