Both Bond Sam and Bond Dave have 10 percent coupons, make semiannual payments, a
ID: 2613486 • Letter: B
Question
Both Bond Sam and Bond Dave have 10 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has four years to maturity, whereas Bond Dave has 17 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam and Bond Dave? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) If rates were to suddenly fall by 2 percent instead, what would be the percentage change in the price of Bond Sam and Bond Dave? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)Explanation / Answer
Assuming all bonds to be of $100 face value
Bond J: Coupon = (3% / 2 )* 100 = 1.5% of 100 = 1.5 ; YTM = 6 /2 = 3% ; N= 12 * 2= 24 ; Future Value = 100
Present Value of Bond J: $ 74.60
Bond K:Coupon = (9% / 2 )* 100 = 4.5% of 100 = 4.5 ; YTM = 6 /2 = 3% ; N= 12 * 2= 24 ; Future Value = 100
Present Value of Bond K: 125.40
CASE 1: YTM increases By 2%
Present Value of Bond J: $ 61.88
Present Value of Bond K: 107.62
CASE 1: YTM decreases By 2%
Present Value of Bond J: $ 90.54
Present Value of Bond K: $ 147.28
Original Price
Case 1 Price
Change In price
% Change
Bond J
74.6
61.88
-12.72
-17.05%
Bond K
125.4
107.62
-17.78
-14.18%
Original Price
Case 2 Price
Change In price
% Change
Bond J
74.6
90.54
15.94
21.37%
Bond K
125.4
147.28
21.88
17.45%
Original Price
Case 1 Price
Change In price
% Change
Bond J
74.6
61.88
-12.72
-17.05%
Bond K
125.4
107.62
-17.78
-14.18%
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