Consider two bonds, a 3-year bond paying an annual coupon of 6.70% and a 10-year

Question

Consider two bonds, a 3-year bond paying an annual coupon of 6.70% and a 10-year bond also with an annual coupon of 6.70%. Both currently sell at face value of $1,000. Now suppose interest rates rise to 12% a. What is the new price of the 3-year bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Bond price b. What is the new price of the 10-year bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Bond price c. Which bonds are more sensitive to a change in interest rates? Long-term bonds O Short-term bonds

Explanation / Answer

Ans A Ans B For 3 year Bond For 10 year Bond FV 1000 FV 1000 NPER 3 NPER 10 PMT 67 (1000 x 6.7%) PMT 67 (1000 x 6.7%) Rate 12% Rate 12% PV ($872.70) PV ($700.54) =PV(0.12,3,67,1000) =PV(0.12,10,67,1000) Ans C Long term bonds is more sensitive to change in interest rates.

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