Question 5 (Bonds) (16 marks)
Bonds K and L both have a face value of $1,000, pay semi-annual coupons and have 15 years remaining until maturity. Their coupon rates are 6% and 8% respectively. If the prevailing market rate decreases from 7.5% to 6.5% compounded semiannually.
(a) Calculate the price change of each bond in dollars. (4 marks)
(b) Calculate the price change of each bond as a percentage of the initial price. (4 marks)
(c) Are high-coupon or low-coupon bonds more sensitive to a given interest rate change? Justify your response using the results from part (b). (4 marks)
(d) What would be the coupon rate that would lead to the largest price change as a percentage of the initial price? What would be this percentage change? (4 marks)
Bonds K and L both have a face value of $1,000 are determined.