Given the following information what is the percentage change in the price of th

Question

Given the following information what is the percentage change in the price of the bonds if interest rates suddenly rise by 4%? Wing Air Inc Coupon rate Settlement date Maturity date Face value # of coupons per year 7% 1/1/2000 1/1/2002 1,000 2 Airfoil, Inc. Coupon rate Settlement date Maturity date Face value # of coupons per year 7% 1/1/2000 1/1/2015 1,000 2 Change in interest rate 4% O wing Air-7.01%, Airfoil-29.07% O Wing Air-12.27%, Airfoil-50.87% O wing Air-7.0%, Airfoil-29.22% O Wing Air 7.7196, Airfoil 48.03%

Explanation / Answer

Win air inc coupon rate 7% Interest rate 4% 11% Bond terms 2 years Semi annaual return 1000*7/2=35 present value factor 5.5 % @ 4 yearr 0.807217 annuity Discount factor of 5.5% for 4 period 3.50515 price of bond 0.807217x1000+3.505150x35 929.9 percentage cahnge in bond price 7.01% (1000-929.9)/1000x100 Airfoil inc coupon rate + interest rate (7%+4%) 11% Bond terms 15 years Semi annaual interest 1000x7%/2 = 35 present value factor 5.5 % @ 30 yearr 0.200644 present value factor annuity doscounted 14.53375 5.5% @30 period price of bond*(0.2006442x1000+14.53375x35 709.33 percentage cahnge in bond price (1000-709.33)/1000*100 2.91% Answer - option " A" is correct as per the explanasion given above   THEREFORE OPTION A i.e. wing air 7.01% and airfoil -29.07

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