Laurel, Inc., and Hardy Corp. both have 10 percent coupon bonds outstanding, wit

Question

Laurel, Inc., and Hardy Corp. both have 10 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel. Inc., bond has six years to maturity, whereas the Hardy Corp bond has 19 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of each bond? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers as a percent rounded to 2 decimal places (e.g. 32.16).) Percentage change in price of Laurel, Inc . bond Percentage change in price of Hardy Corp. bond If rates were to suddenly fall by 2 percent instead, what would be the percentage change in the price of each bond? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).) Percentage change in price of Laurel, Inc., bond Percentage change in price of Hardy Corp. bond

Explanation / Answer

1. If interest rate rises by 2%

Price of Bond of Laurel Inc. = 50 x PVAF(6%, 6years) + 1,000 x PVF(6%, 6years) = (50 x 4.917) + (1,000 x 0.705) = $950.83
Percentage change in price = (950.83 - 1,000) / 1,000 = 4.92% decrease

Price of Bond of Hardy Corp. = 50 x PVAF(6%, 19years) + 1,000 x PVF(6%, 19years) = (50 x 11.158) + (1,000 x 0.331) = $888.42
Percentage change in price = (888.42 - 1,000) / 1,000 = 11.16% decrease

2.1. If interest rate falls by 2%

Price of Bond of Laurel Inc. = 50 x PVAF(4%, 6years) + 1,000 x PVF(4%, 6years) = (50 x 5.242) + (1,000 x 0.790) = $1,052.42
Percentage change in price = (1,052.42 - 1,000) / 1,000 = 5.24% increase

Price of Bond of Hardy Corp. = 50 x PVAF(4%, 19years) + 1,000 x PVF(4%, 19years) = (50 x 13.134) + (1,000 x 0.475) = $1,131.34
Percentage change in price = (1,131.34 - 1,000) / 1,000 = 13.13% increase

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