Two bonds make semiannual interest payments of $50. Bond A matures in 2 years and Bond B matures in 12 years. Both bonds currently sell at par ($1,000).
a) Calculate the price of each bond if the yield to maturity increases to 12 percent. What is the percentage change in price for each bond?
b) Calculate the price of each bond if the yield to maturity decreases to 8 percent. What is the percentage change in price for each bond versus the base case?
c) What do you conclude about the relationship between time to maturity and the sensitivity of bond prices to interest rates?