Question: Question #2 - 10 Marks RBC has issued two new bonds. Bond A and Bond B. Bond A and Bond B both have 7% coupons,

Question #2 - 10 Marks RBC has issued two new bonds.

Question #2 - 10 Marks RBC has issued two new bonds. Bond A and Bond B. Bond A and Bond B both have 7% coupons, make semi- annual payments and are priced at par value. Bond A has 3 years to maturity whereas Bond B has 20 years to maturity. If interest rates suddenly rise by 2%, what is the percentage change in the price of Bond A. Of Bond B? If rates were to suddenly fall by 2% instead, what would the percentage change in the price of Bond A be then? Of Bond B? What does this problem tell you about the interest rate risk of longer-term bonds

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