Consider 2 bonds, A and B. The coupon rates are 10% and the face values are $1,000 for both bonds. Both bonds have annual coupons. Bond A has 20 years to maturity while Bond B has 10 years to maturity.
a. What are the prices of the 2 bnds if the relevant market interest rate for both bonds is 10%?
b. If the market interest rate increases to 12%, what will be the prices of the 2 bonds?
c. If the market interest rate decreases to 8%, what will be the prices of the 2 bonds?
d. If the market interest rates unexpectedly increases, what would be the effect on the price of Bond A as compared to Bond B? Why?