Question

You have gathered the following data on three bonds:
a. If the market's required return on all three bonds is 6%, what are the market prices of the bonds (you can assume annual interest payments).
b. The market's required return suddenly rises to 7%. What are the new bonds prices, and what is the percentage change in price for each bond?
c. If the market's required return falls from the initial 6% to 5%, what are the new prices, and what is the percentage change in each price relative to the answer obtained in part (a)?
d. Which bond's price is most sensitive to interest rate movements? Does this answer surprise you? Why or why not? Can you explain why this bond's price is so sensitive to rate changes?
e. Which bond's price is least sensitive to interest rate movements? Explain.


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  • CreatedMarch 26, 2015
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