Question

Bond A pays $8,000 in 20 years. Bond B pays $8,000 in 10 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 7 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 14 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 7 percent versus 14 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 _______  sensitive to changes in the interest rate.

Answer 1