Question: Question 3 (13 Marks) Bond Star is a 4% semi-annual coupon bond while Bond Mars is a 12% semi-annual coupon bond. Both Bond Star and

Question 3 (13 Marks) Bond Star is a 4% semi-annual coupon

Question 3 (13 Marks) Bond Star is a 4% semi-annual coupon bond while Bond Mars is a 12% semi-annual coupon bond. Both Bond Star and Bond Mars have 8 years to maturity, a face value of $1,000 and a yield to maturity of 10%. a. All other things remain same, if interest rates unexpectedly rise by 2%, what would be the percentage change in the price of Bond Star and Bond Mars? Show all your calculations. 5 marks b. All other things remain same, if interest rates unexpectedly fall by 2%, what would be the percentage change in the price of Bond Star and Bond Mars? Show all your calculations. 5 marks Referring to your answers in (a) & (b), what can you tell about the interest rate risk of lower coupon bonds? 3 marks c

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