Interest Rate Risk

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CulturedQuant

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Which of the two has greater interest rate risk?

Issue 1: Coupon Rate =7.25%;Maturity=12yrs;Trading in the Market at7.4%
Issue 2: Coupon Rate=7.5%;Maturity=11yrs; Trading in the market at 8%

Extracted from

SS14:Reading 63
 
Issue 1 because (a) lower coupon and (b) longer maturity.
 
I made a mistake on the question. Assuming Issue 1 has maturity of 10 yrs, how will change your answer.

Another question: Does the market/trading rate affect the Interest Rate at all?
 
If issue 1 has 10-year maturity, then you need to calculate its duration.
Higher duration => more sensitivity to interest rate change.
 
How do you calculate the duration? And I think you need to factor in the Trading rate in computation

Page 36 of CFAI Volume IV: ...the bond that trades at a lower yield is more volatile in terms of percentage change and absolute price change....
 
There is a equation for duration in SS14 & 15.

usually, duration is the change in price given change in interest rate.

I agree, yield does effect % change in price. however, I do'nt think market/trading rate effect the interest rate. Interest rate is a function of market/inflation.
 
Thanks CFAhouston. Got it. Found the formula too! Look at my new question :)
 
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