Both Bond Bill and Bond Ted have 6.2 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 5 years to maturity, whereas Bond Ted has 25 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Bill? Of Bond Ted? Both bonds have a par value of $1,000. If rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Bond Bill be then? Of Bond Ted? Illustrate your answers by graphing bond prices versus YTM. What does this problem tell you about the interest rate risk of longer-term bonds?

Brian has just finished college. he wants to set up a small business to make and sell fireworks. he registers his company and acquires a license from the government. he finds that most of his competitors are selling fireworks at an extremely low price. he would like to make more money, so he decides to innovate and develop better fireworks. he sells his fireworks at a higher price, and they are a huge hit with the customers. after a few years, he earns enough profit to set up a bigger fireworks factory that complies with the government’s health and safety regulations. he even starts exporting fireworks overseas. which type of economy does this scenario describe?