Question: We will use the numbers X= 4, Y= 4, Z= 6 Bonds and Interest Rate Risk Suppose you purchase $1000 face-value of each of the

We will use the numbers X= 4, Y= 4, Z= 6

Bonds and Interest Rate Risk

Suppose you purchase $1000 face-value of each of the following two bonds. Bond A: 0% Coupon rate, Treasury Bond, 30-year maturity and yield to maturity 4% quoted with annual compounding. Bond B: Treasury 3% Coupon, with annual coupon payments, 30-year maturity and yield to maturity of 4% quoted with annual compounding. Draw two lines on the same graph to illustrate how the price of each of the bonds will change with yield to maturity i.e., a graph of the bond price vs yield to maturity of each bond while keeping all other inputs unchanged. If the yield to maturity of both bonds increase by 1% right after you purchase them, by what percentage do Bond A and Bond B prices change? Show these points and corresponding prices on your graph. Which bond price is more sensitive to interest rate changes and why?

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