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Consider two bonds, call them A and B. Both bonds have face value of $1,000 and term to maturity of 16 years. The coupon rate of A is zero while the coupon rate of B is 10% per annum. Suppose B pays coupons annually. The current yield to maturity of A is 10% per annum and of B is 8% per annum. Calculate the percentage changes in the prices of the two bonds in the following situations (the changes are to be calculated on the basis of the original price): i) The yield-to-maturity of each bond rises by one percentage point ii) The yield-to-maturity of each bond declines by one percentage point Which of the two bonds has highest interest rate?

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Financial Management, Finance

Category:- Financial Management
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