Bonds A and B have the same time to maturity of 2 years. The coupon rate for Bond A is 6%, while the coupon rate for bond B is 10%. Par value is $1,000.
a) (10 points) Which bond has more price risk. Explain.
b) (5 points) Calculate Macaulay's duration for bond A assuming that its yield to maturity is 6%.
c) (10 points) Explain the meaning (interpretation) of modified duration.
- (5 points) If the market yield changes by 80 basis points, using duration, what is the percentage change in bond A's price?