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Compute the prices of bond alpha

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Both Bond Alpha and Bond Beta have 8% coupons, $1,000 face-value, make semi-annual payments and are priced at par value. Bond Alpha has 2 years to maturity, whereas Bond Beta has 15 years to maturity.

  1. If interest rates suddenly rise by 2%, what is the percentage change in the price of Bond Alpha relative to the original price? and If rates were to suddenly fall by 2%, what would the percentage change in the price of Bond Alpha relative to the original price?  
  2. If interest rates suddenly rise by 2%, what is the percentage change in the price of Bond Beta relative to the original price? and If rates were to suddenly fall by 2%, what would the percentage change in the price of Bond Beta relative to the original price?
  3. Compute the prices of Bond Alpha and Bond Beta for market interest rates (YTM) between 2%-17% (with 1% increment). Please present your estimates in a table (you may do the computation using Excel and report only the bond prices in the table along with market interest rates). Then illustrate your answer by graphing bond prices versus YTM. What does the graph tell you about interest rate risk of longer-term bonds?

Reference no: EM132396657

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