Explain which bond will trade at a higher price in the market and why? What happens to the market price of each bond if the interest rates in the economy go up? Elaborate on your rationale.

DISCUSSION ESSAY

Two bonds A and B have the same credit rating, the same par value, and the same coupon rate.

Bond A has 30 years to maturity and bond B has 5 years to maturity.

• Explain which bond will trade at a higher price in the market and why?
• What happens to the market price of each bond if the interest rates in the economy go up? Elaborate on your rationale.
• Which bond would have a higher percentage price change if interest rates go up? Explain.

Substantiate your argument with numerical examples.

• As a bond investor, if you expect a slowdown in the economy over the next 12 months, what would be your investment strategy?