Conside r tw o bonds , M M an d NN: ■ Bond MM has face value of $1,000, matures in five

_{Conside r tw o bonds , M M an d NN:}

■ Bond MM has face value of $1,000, matures in five years, and pays

6% interest semiannually.

■ Bond NN has a face value of $1,000, matures in five years, and pays

2% interest semiannually.

a. If the yield-to-maturity on these bonds changes from 4% to 6%, which bond’s value changes the most?

b. Which bond has the greatest interest rate risk? Why?

c. Which bond has the greatest reinvestment rate risk? Why?