Both Bond Bill and Bond Ted have 12 percent coupons, make semiannual payments, a

Question

Both Bond Bill and Bond Ted have 12 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 3 percent, what is the percentage change in the price of these bonds? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)

If rates were to suddenly fall by 3 percent instead, what would be the percentage change in the price of these bonds? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

If interest rates suddenly rise by 3 percent, what is the percentage change in the price of these bonds? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).)

Explanation / Answer

When the bond rate rises from 12% to 15% (3% increase) Bill Ted Compounding = Semi annually Compounding = Semi annually Par value         1,000 Par value         1,000 Coupon Rate 6.0% Coupon Rate 6.0% Market Rate 7.5% Market Rate 7.5% N                 6 N               40 Current bond price 929.59 Current bond price 811.08 Percentage change in price is calculated below: Percentage change in price = (New price - original price)/Original price Bond Bill -7.04% Bond Ted -18.89% When the bond rate rises from 12% to 9% (3% fall) Bill Ted Compounding = Semi annually Compounding = Semi annually Par value         1,000 Par value         1,000 Coupon Rate 6.0% Coupon Rate 6.0% Market Rate 4.5% Market Rate 4.5% N                 6 N               40 Current bond price 1077.37 Current bond price 1276.02 Percentage change in price is calculated below: Percentage change in price = (New price - original price)/Original price Bond Bill 7.74% Bond Ted 27.60% All else the same, the longer the maturity of a bond, the greater is its price sensitivity to change in interest rates.

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