Problem
Both Bond Sam and Bond Dave have 7 percent coupons, make semi-annual payments, and are priced at par value. Bond Sam has 4 years to maturity, whereas Bond Dave has 18 years to maturity.
i. If the interest rates suddenly rise by 3%, what is the percentage change in the price of Bond Sam? Of Bond Dave?
ii. If the rates were to suddenly fall by 3% instead, what would the percentage change in the price of Bond Sam be then? Of Bond Dave
Illustrate your answers by graphing Bond Price versus YTM for both bonds on one graph. What does this problem tell you about the interest rate risk of longer maturity bond?