Both Bond Sam and Bond Dave have 11 percent coupons, make semiannual payments, a

Question

Both Bond Sam and Bond Dave have 11 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 3 years to maturity, wheareas Bond Dave has 12 years to maturity. If interest rates suddenly fall by 3 percent, the percentage change in the price of Bonds Sam and Dave is _______ percent and ___________ percent, respectively.

Both Bond Sam and Bond Dave have 11 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 3 years to maturity, wheareas Bond Dave has 12 years to maturity. If interest rates suddenly fall by 3 percent, the percentage change in the price of Bonds Sam and Dave is _______ percent and ___________ percent, respectively.

Explanation / Answer

Both Bond Sam and Bond Dave have 9 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 3 years to maturity, wheareas Bond Dave has 14 years to maturity. If interest rates suddenly fall by 2 percent, the percentage change in the price of Bonds Sam and Dave is percent and percent, respectively.

Change in Percentage of price = (new price – orginal price) / orginal price

Sam------- Change in Percentage of price = (950 .04 -1000)/1000= -5%

Bond dave ------- Change in Percentage of price = (839.54 -1000)/1000= -16.05%

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