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Can we say that prices of bonds are equally sensitive to the same percentage increases or...

Can we say that prices of bonds are equally sensitive to the same percentage increases or decreases of the market interest rate (YTM)? Explain. (i.e. Market interest rate increases, say, from 5% to 6% or decreases from 5% to 4%)

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Expert Solution

No There bonds price will not be equally sensitive to interest increase and interest decrease at the same. it can be confirmed with an example.

at YTM 5% with coupon being 5% the price of bond is at Par value

at YTM 6% the price of bond is at discount of $916.16 a decrease of 8.38%

at YTM 4% the price of bond is at premium of $1093.85 a incraese of 9.385%

we can see the prices of bonds are not equally sensitive to the same percentage increases or decreases of the market interest rate. This happened due to time value of money.

jeff jeffy answered 1 year ago
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