Which of these bonds has the highest interest rate risk

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Reference no: EM132033728

There are two bonds that both have 10 years to maturity and have a YTM of 8%. Bond Alpha has a 4% coupon rate (with semi-annual payments) and Bond Beta has a 12% coupon rate (with semi-annual payments).

What are prices of the bonds today?

Alpha=728.19; Beta=1271.81

If interest rates increase by 2%, what will be the new price of the two bonds? What is the percentage change in the prices?

Alpha=626.13; Beta=1124.62

Now assume that interest rates decrease by 2% from where they were originally. Now that are the prices for the two bonds and what are the percentage changes in their prices?

Alpha=851.23; Beta=1446.32

Interest rate risk is a measure of how much a bond's value changes when interest rates change. Which of these bonds has the highest interest rate risk?

Reference no: EM132033728

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