Question: Problem 4: [15 points] (a) Bond J has a coupon rate of 4% and Bond K has a coupon rate of 8%. Both bonds make

Problem 4: [15 points] (a) Bond J has a coupon rate

Problem 4: [15 points] (a) Bond J has a coupon rate of 4% and Bond K has a coupon rate of 8%. Both bonds make semi-annual coupon payments, have a maturity of 20 years, and are priced to have a YTM of 6% (semi-annually compounded). Suppose YTM goes up by 1%; what will be the percentage changes in the price of the two bonds? What will be the percentage change if YTM goes down by 1%? Give an intuitive explanation for your results. [8 points] (b) Suppose you buy a bond today at $1060. The bond has a par value of $1000 and pays a coupon rate of 7%. Coupons are paid semiannually, and the bond has 17 years to mature. Two years from now, you sell the bond when the YTM has gone down by 1% from the current YTM. What is your holding period yield? [7 points]

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