Both Bond Sam and Bond Dave have 9 percent coupons, make semiannual payments, an

Question

Both Bond Sam and Bond Dave have 9 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has four years to maturity, whereas Bond Dave has 15 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. Round your answers 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?

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?

Explanation / Answer

lets assume that the face value of each bond is $1000

New YTM = 11%

Price of Sam's bond:

% change in Sam's bond = ((897.08-1000)/1000)

= -10.29%

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Price of Dave's bond:

% change on Dave's bond = ((856.18-1000)/1000)

= -14.38%

Year Cashflow Present Value 1 90 81.08 2 90 73.05 3 90 65.81 4 90 59.29 5 90 53.41 6 90 48.12 7 90 43.35 8 1090 472.98 Price 897.08

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