Question

At market interest rate level of 2%, a ten-year and a 30-year bond ( both with 8% coupon rates and semiannual payment ) are selling at the prices $1,541.37 and $2,348.65, respectively. If you expected that interest rate will jump to 10% from the current level, which bond is risker and which bond is more profitable if interest rate drop significantly

Answer 1

30 year Bond , 30 year Bond

Step-by-step explanation:

Market interest rate = 2%

Coupon rates for both ten-year bond and 30-year coupon bound = 8%

semi-annual payments : $1541.37 , $2348.65 respectively

Determine which bond is riskier

Assuming interest rate rise to 10%

Given that both both bonds have the same Coupon rate but the semiannually payments are different ( i.e. Ten year bond = $1541.37 , 30-year Bond = $2348.65 )

The riskier Bond will be the Riskier Bond , The more profitable Bond if the interest rate drop drastically will be 30 year Bond as well