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Two bonds have been recommended to you, Bond X and Bond Y, both with par value of $1,000 and 3 years before maturity. Bond X pays 8% annual coupon, and Bond Y pays 12% semiannual coupon. The two bonds are considered to have the same level of risk, and therefore the same Yield to Maturity (YTM), which is 10% as an effective annual rate (1.e. EFF%).

a) Without calculation, explain the value of which bond is more sensitive to changes in the market interest rate.

b) Calculate the current price of each of the two bonds. (Hint: for bond Y, the coupon rate given is a nominal rate, whereas the YTM given is an effective rate)


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