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CHAPTER 7 B-137 P Dave Enter 40 3.5% \$45 \$1,000 N I/Y PV PMT FV Solve for \$1,1213.55 P Dave % = (\$1,213.55 – 1,000) / \$1,000 = + 21.36% All else the same, the longer the maturity of a bond, the greater is its price sensitivity to changes in interest rates. 17. Initially, at a YTM of 8 percent, the prices of the two bonds are: P J Enter 18 4% \$20 \$1,000 N I/Y PV PMT FV Solve for \$746.81 P K Enter 18 4% \$60 \$1,000 N I/Y PV PMT FV Solve for \$1,253.19 If the YTM rises from 8 percent to 10 percent: P J Enter 18 5% \$20 \$1,000 N I/Y PV PMT FV Solve for \$649.31 P J % = (\$649.31 – 746.81) / \$746.81 = – 13.06% P K Enter 18 5% \$60 \$1,000 N I/Y PV PMT FV Solve for \$1,116.90 P K % = (\$1,116.90 – 1,253.19) / \$1,253.19 = – 10.88% If the YTM declines from 8 percent to 6 percent: P J Enter 18 3% \$20 \$1,000 N I/Y PV PMT FV Solve for \$862.46 P J % = (\$862.46 – 746.81) / \$746.81 = + 15.49% P K Enter 18 3% \$60 \$1,000 N I/Y PV PMT FV Solve for \$1,412.61 P K % = (\$1,412.61 – 1,253.19) / \$1,253.19 = + 12.72% All else the same, the lower the coupon rate on a bond, the greater is its price sensitivity to changes in interest rates.

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