The Faulk Corp. has a 6 percent coupon bond outstanding. The Gonas Company has a

Question

The Faulk Corp. has a 6 percent coupon bond outstanding. The Gonas Company has a 12 percent bond outstanding. Both bonds have 20 years to maturity, make semiannual payments, and have a YTM of 9 percent.

If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds?(Negative amounts 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))

What if interest rates suddenly fall by 2 percent instead? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

The Faulk Corp. has a 6 percent coupon bond outstanding. The Gonas Company has a 12 percent bond outstanding. Both bonds have 20 years to maturity, make semiannual payments, and have a YTM of 9 percent.

Explanation / Answer

Given case 2% increase in interest 2% reduction in interest Given case 2% increase in interest 2% reduction in interest Bond Price = FV { 1/(1+R/m)mN + (Cr/R) (1 - (1+R/m)-mN)} Faulk Faulk Faulk Gonas Gonas Gonas Years to Maturity: N = years 20 years = 40 periods 20 years = 40 periods 20 years = 40 periods 20 years = 40 periods 20 years = 40 periods 20 years = 40 periods Annual Coupon Rate: Cr = % as a percentage of the Maturity Value 6% 8% 4% 12% 14% 10% Coupons per Year: m = 2 2 2 2 2 2 Bond Value at Maturity: Face Value = $ 1000 1000 1000 1000 1000 1000 Yield to Maturity: R = % expressed as a percentage 9% 9% 9% 9% 9% 9% Bond Value = ? ? ? ? ? ? Substituting the values in the above formula to calculate bond price, in a financial calculator, we get $724 $908 $540 $1,276 $1,460 $1,092 % of change in price over the base case (908-724)/724*100 (540-724)/724*100 (1460-1276)/1276*100 (1092-1276)/1276*100 25.4144 -25.4144 14.4201 -14.4201 Rounded off to 25% -25% 14% -14%

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