You are trying to compare the interest rate risks of two bonds: (i) a 6-year 8% bond, and (ii) a 5-year 6% bond. Both bonds pay semi-annual interest payments. The current market interest rate for the 6-year bond is 7.2% and the market interest rate for the 5-year bond is 5.8%.
A. Determine the (Macaulay) durations of the two bonds.
B. Determine the modified durations of the two bonds.
C. Based on your findings in (a) and (b), which bond has a greater interest rate risk? Explain.