Laurel, Inc., and Hardy Corp. both have 9 percent coupon bonds outstanding, with

Question

Laurel, Inc., and Hardy Corp. both have 9 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has 4 years to maturity, whereas the Hardy Corp. bond has 15 years to maturity. If interest rates suddenly rise by 4 percent, the percentage change in the price of Bonds Laurel, Inc., and Hardy Corp. is percent and percent, respectively. (Negative amounts should be indicated by a minus sign. Do not include the percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16))

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Explanation / Answer

After rise in interest rates by 4%, the semi-annual yield to maturity of Laurel Inc and Hardy Corp.is (9%+4%)/2 = 6.5%

After interest rate rise, price of Laurel Inc can be calculated in Excel as =PV(6.5%,4*2,-1000*9%/2,-1000). This is equal to 878.22.

% change in price = (878.22-1000)/1000 = -12.18%

After interest rate rise, price of Hardy Corp can be calculated in Excel as =PV(6.5%,15*2,-1000*9%/2,-1000). This is equal to 738.83.

% change in price = (738.83-1000)/1000 = -26.12%

So answer is:

% change in Laurel Inc = -12.18%

% change in Hardy Corp = -26.12%

Hope this helped ! Let me know in case of any queries.

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