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Compare the Price Sensitivity to Changes in Interest Rates for the Following

question 102

Essay

Compare the price sensitivity to changes in interest rates for the following bonds: A five-year and a ten-year bond, both with a 7 percent coupon.Both bonds currently sell at par.How much will the price of each bond change if interest rates increase to 8 percent? Why is there a difference in the price change?


Definitions:

Decentration

Simultaneous focusing on more than one aspect or dimension of a problem or situation.

Principle

A fundamental truth or proposition that serves as the foundation for a system of belief or behavior.

Reaction Time

The amount of time required to respond to a stimulus.

Cognitive Flexibility

The mental ability to switch between thinking about two different concepts, or to think about multiple concepts simultaneously.

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