Consider the following two bonds:
Bond A
Term to maturity: 25 years from today
Face value: $1,000
Annual Coupon rate: 6%
Number of payments per year: 1
Current YTM is 8%
Bond B
Term to maturity: 20 years from today
Face value: $1,000
Annual Coupon rate: 9%
Number of payments per year: 2
Current YTM is 8%
The bond price is simply the present value of the bonds cash flows. Compute the price for each bond.
Then make a table comparing the bond A and bond B prices if the YTM varies from 1%, 2%, 3%... 17% but every other component of the bonds is held equal.
Compute duration and modified duration for each bond.
Which bond has higher interest rate risk? Why?