a. Investor A holds a 10-year bond, while investor B holds an 8-year bond.

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QUESTION:

a. Investor A holds a 10-year bond, while investor B holds an 8-year bond. If the interest rate increases by 1 percent, which investor has the higher interest rate risk? Explain.

b. Investor A holds a 10-year bond paying 8 percent a year, while investor B also has a 10-year bond that pays a 6 percent coupon. Which investor has the higher interest rate risk? Explain.


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