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

question 63

Essay

Compare the price sensitivity to changes in interest rates for the following bonds: a 5-year and a 10-year bond,each with a 7% 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:

Make or Buy

A decision-making process used by companies to determine whether to produce goods in-house or purchase them from an external supplier.

Incremental Costs

Costs that change depending on the level of production or an alternative course of action.

Additional Revenues

Extra income generated from sources outside of the company's main business operations.

Sunk Cost

Costs that have already been incurred and cannot be recovered or reversed.