Business, 31.03.2021 03:50 starreee

Bond A pays $8,000 in 28 years. Bond B pays $8,000 in 14 years. (To keep things simple, assume these are zero-coupon bonds, which means the $8,000 is the only payment the bondholder receives.) Suppose the interest rate is 5 percent. Using the rule of 70, the value of Bond A is approximately , and the value of Bond B is approximately
Now suppose the interest rate increases to 10 percent. Using the rule of 70, the value of Bond A is now approximately , and the value of Bond B is approximately . Comparing each bond’s value at 5 percent versus 10 percent, Bond A’s value decreases by a percentage than Bond B’s value.

The value of a bond when the interest rate increases, and bonds with a longer time to maturity are (less/more) sensitive to changes in the interest rate.

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Bond A pays $8,000 in 28 years. Bond B pays $8,000 in 14 years. (To keep things simple, assume these...

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