Laurel, Inc., and Hardy Corp. both have 9 percent coupon bonds outstanding, with
ID: 2639655 • 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 four years to maturity, whereas the Hardy Corp. bond has 15 years to maturity.
If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds?(Negative answers should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
If interest rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of these bonds be then? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
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 four years to maturity, whereas the Hardy Corp. bond has 15 years to maturity.
Explanation / Answer
Let the face value = 1000 , So Coupon=0.09*1000/2 45 Laurel Maturity in year 4 Interest factor when ineterst@11% semiannual=(1.055^8) 1.53 Interest factor when ineterst@7% semiannual=(1.035^8) 1.32 Price when interest is 11% = 45*(1.53-1)/(1.53*0.055)+1000/(1.055^8) 935.02 Percentage change=((1000-935.02)/1000)*100 6.50 Price when interest is 7% = 45*(1.32-1)/(1.32*0.035)+1000/(1.035^8) 1071.10 Percentage change=((1071.10-1000)/1000)*100 7.11 Hardy Maturity period in years 15 Interest factor when ineterst@11% semiannual=(1.055^30) 4.98 Interest factor when ineterst@7% semiannual=(1.035^30) 2.81 Price when interest is 11% = 45*(4.98-1)/(4.98*0.055)+1000/(1.055^30) 854.53 Percentage change=((1000-854.53)/1000)*100 14.55 Price when interest is 7% = 45*(2.81-1)/(2.81*0.035)+1000/(1.035^30) 1184.44 Percentage change=((1184.44-1000)/1000)*100 18.44
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.