(a) Calculate the actual price of the bonds for a 100-basis-point (1% annual) increase in interest rates. 

(b) Using (modified) duration, estimate the price of the bonds for a 100-basis- point (1% annual) increase in interest rates.

 (c) Explain why your answers in parts (a) and (b) differ

                                Bond A          Bond B

Coupon                   8%                         9%

Yield to maturity    8%                          8%

Maturity (years)       2                            5

Par                         $100.00             $100.00

Price                      $100.00              $104.055

Answer rating: 100% (QA)

a To calculate the actual price of the bonds for a 100basispoint 1 annual increase in interest rates you need to revalue the bonds using the new yield to maturity For Bond A the new yield would be 8 1 ... View the full answer