Bond X pays an 8% annual coupon and Bond Y pays a 4% annual coupon. Both bonds have 10 years to maturity. The yield to maturity for bod bonds is now 8%.
a. If the interest rate suddenly rises by 2%. By what percentage will the price of the two bonds change?
b. If the interest rate suddenly drops by 2%. By what percentage will the price of the two bonds change?
c. Which bond has more interest rate risk? Why?