Bond A is a premium bond making semiannual payments. The bond pays a coupon rate of 5.3 percent, has a YTM of 3.5 percent, and has 10 years to maturity.
Bond B is a discount bond making semiannual payments. This bond pays a coupon rate of 3.5 percent, has a YTM of 5.3 percent, and also has 10 years to maturity. The bonds have a par value of $1,000. What is the price of each bond today?
Calculate the price of both bonds if interest rates fall by 2%, 1%, and increase by 1%, 2% (so that you have 5 different prices for each bond). Which bond is more sensitive to changes in interest rates? Comment on why.