Bond A pays $4,000 in 14 years. Bond B pays $4,000 in 28 years. (To keep things simple, assume these are zero-coupon bonds, which means the $4,000 is the only payment the bondholder receives.)Suppose the interest rate is 5 percent. Using the rule of 70, the value of Bond A is approximately (250, 500, 1,000, 2,000, 4,000) , and the value of Bond B is approximately (250, 500, 1,000, 2,000, 4,000) .Now suppose the interest rate increases to 10 percent. Using the rule of 70, the value of Bond A is now approximately (250, 500, 1,000, 2,000, 4,000) , and the value of Bond B is approximately (250, 500, 1,000, 2,000, 4,000) .Comparing each bond’s value at 5 percent versus 10 percent, Bond A’s value decreases by a (smaller, larger) percentage than Bond B’s value. The value of a bond (rises, falls) when the interest rate increases, and bonds with a longer time to maturity are (more, less) sensitive to changes in the interest rate.
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Bond A pays $4,000 in 14 years. Bond B pays $4,000 in 28 years. (To keep things simple, assume these...
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