Bond prices and interest rate changes
Consider two 12 per cent $100 government bons that differ only in that
one matures in 2 years’ time and the other in 5 years’ time. Both bonds are currently selling for $100 and pay coupon interest annuity.
A) What will be the price of each bond, given an immediate fall in the required yield to 10
Per cent per annum?
B) What will be the price of each bond, given an immediate increase in the required yield to 14 per cent per annum?
C) Explain the relative price movements in response to interest rate changes as evidenced by parts a) and b)