Both Bond Bill and Bond Ted have 9 percent coupons, make semiannual payments, an

Question

Both Bond Bill and Bond Ted have 9 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 3 years to maturity, whereas Bond Ted has 20 years to maturity. Requirement 1: If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? (Do not include the percent signs (%). Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).) Percentage change in price Bond Bill % Bond Ted % Requirement 2: If rates were to suddenly fall by 2 percent instead, what would be the percentage change in the price of these bonds? (Do not include the percent signs (%). Enter rounded answers as directed, but do not use the rounded numbers in intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Percentage change in price Bond Bill % Bond Ted %

Explanation / Answer

Requirement 1. new interest rate = 11% new price of Bill's bond = 45/(1+11%/2) + 45/(1+11%/2)^2 .....1045/(1+11%/2)^6 =$950.04 Percentage change in price Bond Bill % = $(950.04-1000)/1000 =-5.00% new price of Ted's bond = 45/(1+11%/2) + 45/(1+11%/2)^2 .....1045/(1+11%/2)^40 =$839.54 Percentage change in price Bond Ted =$(839.54-1000)/1000 =-16.05% Requirement 2. new interest rate = 9%-2%= 7% new price of Bill's bond = 45/(1+7%/2) + 45/(1+7%/2)^2 .....1045/(1+7%/2)^6 =$1,053.29 Percentage change in price Bond Bill % = $(1,053.29-1000)/1000 =5.33% new price of Ted's bond = 45/(1+7%/2) + 45/(1+7%/2)^2 .....1045/(1+7%/2)^40 =$1,213.55 Percentage change in price Bond Ted =$(1,213.55-1000)/1000 =21.36%

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