Problem: 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.
(b) Calculate the price change of each bond as a percentage of the initial price.
(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).
(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?