Laurel, Inc., and Hardy Corp. both have 9 percent coupon bonds outstanding, with
ID: 2631665 • Letter: L
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 5 years to maturity, whereas the Hardy Corp. bond has 16 years to maturity. If interest rates suddenly fall by 2 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))
Explanation / Answer
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 5 years to maturity, whereas the Hardy Corp. bond has 16 years to maturity. If interest rates suddenly fall by 2 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))
Laurel, Inc.,
Price after interest rates suddenly fall by 2 percent = pv(rate,nper,pmt,fv)
rate = 7%/2 = 3.5%
nper = 5*2 = 10
pmt = 1000*9%*1/2 = 45
fv = 1000
Price after interest rates suddenly fall by 2 percent = pv(3.5%,10,45,1000)
Price after interest rates suddenly fall by 2 percent = 1083.17
Percentage change in the price of Laurel, Inc = (1083.17-1000)/1000
Percentage change in the price of Laurel, Inc = 8.32%
Hardy Corp.
Price after interest rates suddenly fall by 2 percent = pv(rate,nper,pmt,fv)
rate = 7%/2 = 3.5%
nper = 16*2 = 32
pmt = 1000*9%*1/2 = 45
fv = 1000
Price after interest rates suddenly fall by 2 percent = pv(3.5%,32,45,1000)
Price after interest rates suddenly fall by 2 percent = 1190.69
Percentage change in the price of Hardy Corp = (1190.69-1000)/1000
Percentage change in the price of Hardy Corp = 19.07%
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