Consider two bonds that have the following characteristics not that both bonds pay coupon (interest) once per year: Bond A: Face amount: $1,000, Coupon: 3%, Term 5 years Bond B: Face amount: $5,000, Coupon 2%, Term 3 years Assume that the market discount rate for bond A is 5%, and the market discount rate for bond B is 4.5%. Answer the following questions:
a. Which of these two bonds is the market saying is riskier?
b. What is the current market price of each bond?
c. What is the dollar duration of each bond?
d. What is the DV01, Modified Duration, and Macaulay’s duration of each bond?
e. If the market discount rate for each bond rises by 50 basis points, how much would you expect the price of each bond to change by using dollar duration? What percentage price change would you expect give the Modified duration of each bond?