An investor today buys two bonds, A and B, that have the same characteristics except for their durations. Bond A has a life of 3 years, while B has a life of 20 years. Both securities are purchased at their nominal value (that is, at par) which is 1000 euros. The issue rate of both securities is 7%, and the coupons are paid once a year. So, both securities offer a yield to maturity of 7%. One year after the purchase of the securities, interest rates on newly issued bonds have risen to 9%, so the market prices of bonds A and B should fall so that they offer their potential buyers yields similar to those offered by securities of the same features, i.e. 9%.
What will be the new market prices of the two bonds? Which bond has experienced the largest percentage change in price due to the change in interest rates from 7% to 9%?

Answer rating: 100% (QA)

To calculate the new market prices of the two bonds we need to use the bond pricing formula Bond Pri... View the full answer