# Interest rate risk and bond pr

Interest rate risk and bond price changes Fidelity Music Inc. has an older high-yield bond (i.e., junk bond) issue and a more recent investment grade bond issue, both with \$1,000 par values. Fidelity’s high-yield 11% coupon bonds have a YTM of 14% and will mature in nine years. The investment grade bonds have a 9% YTM, mature in 22 years, and pay a 6.5% annual coupon. As a bond investor you would like to evaluate the bond price sensitivity to underlying interest rate fluctuations for both Fidelity Music bond issues.

a. What is the current price of both bonds?

b. What will be the percentage change in bond price for both bonds if the underlying interest rates increase by 2%? Which bond has more price sensitivity to interest rate risk.?

c. Alternatively, what will be the percentage change in bond price for both bonds if the underlying interest rates decrease by 2%? Which bond has more price sensitivity to interest rate risk?

d. What conclusions do you draw from comparing your answers to parts b and c?

e. Would your answers to parts b through c change if both bonds matured in 13 years and paid a 12% annual coupon and, if so, how?

# Interest rate risk and bond pr

Interest rate risk and bond price changes Apex Corp. has two outstanding bond issues. One issue consists of 7% annual coupon bonds and the other issue consists of zero-coupon bonds. Both bonds have a \$1,000 par value. For each bond, calculate the bond price and the percentage change in price when the required rate of return changes as described below.

a. Ten years to maturity and the required rate of return goes from 7% to 8%.

b. Twenty years to maturity and the required rate of return goes from 7% to 8%.

c. Ten years to maturity and the required rate of return goes from 7% to 6%.

d. Twenty years to maturity and the required rate of return goes from 7% to 6%.