There are two bonds that both have 10 years to maturity and have a YTM of 8%. Bond Alpha has a 4% coupon rate (with semi-annual payments) and Bond Beta has a 12% coupon rate (with semi-annual payments).
What are prices of the bonds today?
Alpha=728.19; Beta=1271.81
If interest rates increase by 2%, what will be the new price of the two bonds? What is the percentage change in the prices?
Alpha=626.13; Beta=1124.62
Now assume that interest rates decrease by 2% from where they were originally. Now that are the prices for the two bonds and what are the percentage changes in their prices?
Alpha=851.23; Beta=1446.32
Interest rate risk is a measure of how much a bond's value changes when interest rates change. Which of these bonds has the highest interest rate risk?