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Both Bond Bill and Bond Ted have 7% coupons, make half-yearly payments,

have a $1000 face value, and are priced at par value. Bond Bill has three years to maturity, whereas

Bond Ted has 20 years to maturity.

a)

Considering no change in time;

if interest rates suddenly rise by 2%, what is the percentage

change in the price of Bond Bill and Bond Ted?

b)

Considering no change in time;

if rates were to suddenly fall by 2%, what would the

percentage change in the price of Bond Bill and Bond Ted?

c)

Illustrate your answers by graphing bond prices versus YTM.

d)

What does this problem tell you about the interest rate risk of longer-term bonds?For Bond TedCoupon : 7 1. = 1600 xfy. = Fo yearly.Half yearly : 35Bond forice calculated as : C-U + Ka ) “FVKd(+ k )As When price = face valueintorest rate would be equal to Coupon…

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