You Own Two Bonds: a 5-Year and a 10-Year Bond

question 101

Essay

You own two bonds: a 5-year and a 10-year bond, each with a 7% annual coupon. Both bonds currently sell at par. How much will the price of each bond change if interest rates increase to 8%? Why is there a difference in the price change?

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Definitions:

Cash Flow Problems

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Economic Recession

A period of temporary economic decline during which trade and industrial activity are reduced, typically identified by a fall in GDP in successive quarters.

Codes of Ethics

Formal documents outlining the principles and standards of behavior expected in a professional or organizational setting.

Ethical Dilemma

A situation in which a person faces conflicting moral principles, making it challenging to decide the right course of action.