The Faulk Corp. has a 6 percent coupon bond outstanding. The Gonal Company has a 14 percent bond outstanding. Both bonds have 8 years to maturity, make semiannual payments, and have a YTM of 10%.
a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds?
b. What if interest rates suddenly fally by 2 percent instead?
c. What does this problem tell up about the interset rate risk of lower coupon bonds?