Uploaded by Pak Ho Wong

Exercise 2

1. Both Bond S and Bond D have 7.3% coupons, make semiannual payments, and are
priced at par value. Bond S has three years to maturity, whereas Bond D has 20 years
to maturity. If interest rates suddenly rise by 2%, what is the percentage change in the
price of the Bond S? of Bond D? What if rates suddenly fall by 2% instead? What dost
this problem tell you about the interest rate risk of bonds?