Both bond A and bond B have 6.8 percent coupons and are priced at par value. Bon
ID: 2649964 • Letter: B
Question
Both bond A and bond B have 6.8 percent coupons and are priced at par value. Bond A has 9 years to maturity, while bond B has 15 years to maturity.
Assume if interest rates suddenly rise by 1.2 percent, what is the percentage change in price of bond A and bond B? (Round your answer to 2 decimal places. Negative answers should be indicated by a minus sign. Omit the "%" sign in your response.)
Assume if interest rates suddenly fall by 1.2 percent instead, what would the percentage change in price of bond A and bond B? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)
a)
Assume if interest rates suddenly rise by 1.2 percent, what is the percentage change in price of bond A and bond B? (Round your answer to 2 decimal places. Negative answers should be indicated by a minus sign. Omit the "%" sign in your response.)
Explanation / Answer
a)Assume if interest rates suddenly rise by 1.2 percent, what is the percentage change in price of bond A and bond B? (Round your answer to 2 decimal places. Negative answers should be indicated by a minus sign. Omit the "%" sign in your response.)
Answer
Bond A - 7.60%
Bond B - 10.38%
Working
If Interest Rate suddenly rises by 1.2%
Bond A
Current Bond Price = Par Value = $ 1000
Bond Price Would be = pv(rate, nper,pmt,fv)
Nper (indicates the semi annual period) = 9*2 = 18
PV (indicates the price) = ?
PMT (indicate the semi annual payment) = 1000*6.8%*1/2 = 34
FV (indicates the face value) = 1000
Rate (indicates semi annual rate) = (6.8+1.2) * 1/2 = 4%
Bond Price Would be = pv( 4%,18,34,1000)
Bond Price Would be = $ 924.04
Change in Bond Price = Bond Price Would be - Current Bond Price
Change in Bond Price = 924.04 - 1000
Change in Bond Price = - $ 75.96
Percentage Change in Bond Price = Change in Bond Price/Current Bond Price
Percentage Change in Bond Price = -75.96/1000
Percentage Change in Bond Price = - 7.60%
Bond B
Current Bond Price = Par Value = $ 1000
Bond Price Would be = pv(rate, nper,pmt,fv)
Nper (indicates the semi annual period) = 15*2 = 30
PV (indicates the price) = ?
PMT (indicate the semi annual payment) = 1000*6.8%*1/2 = 34
FV (indicates the face value) = 1000
Rate (indicates semi annual rate) = (6.8+1.2) * 1/2 = 4%
Bond Price Would be = pv( 4%,30,34,1000)
Bond Price Would be = $ 896.25
Change in Bond Price = Bond Price Would be - Current Bond Price
Change in Bond Price = 896.25 - 1000
Change in Bond Price = - $ 103.75
Percentage Change in Bond Price = Change in Bond Price/Current Bond Price
Percentage Change in Bond Price = -103.75/1000
Percentage Change in Bond Price = - 10.38%
b)Assume if interest rates suddenly fall by 1.2 percent instead, what would the percentage change in price of bond A and bond B? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)
Answer
Bond A 8.39%
Bond B 12.07%
Working
If Interest Rate suddenly rises by 1.2%
Bond A
Current Bond Price = Par Value = $ 1000
Bond Price Would be = pv(rate, nper,pmt,fv)
Nper (indicates the semi annual period) = 9*2 = 18
PV (indicates the price) = ?
PMT (indicate the semi annual payment) = 1000*6.8%*1/2 = 34
FV (indicates the face value) = 1000
Rate (indicates semi annual rate) = (6.8-1.2) * 1/2 = 2.8%
Bond Price Would be = pv( 2.8%,18,34,1000)
Bond Price Would be = $ 1083.93
Change in Bond Price = Bond Price Would be - Current Bond Price
Change in Bond Price = 1083.93 - 1000
Change in Bond Price = $ 83.93
Percentage Change in Bond Price = Change in Bond Price/Current Bond Price
Percentage Change in Bond Price = 83.93/1000
Percentage Change in Bond Price = 8.39%
Bond B
Current Bond Price = Par Value = $ 1000
Bond Price Would be = pv(rate, nper,pmt,fv)
Nper (indicates the semi annual period) = 15*2 = 30
PV (indicates the price) = ?
PMT (indicate the semi annual payment) = 1000*6.8%*1/2 = 34
FV (indicates the face value) = 1000
Rate (indicates semi annual rate) = (6.8-1.2) * 1/2 = 2.8%
Bond Price Would be = pv( 2.8%,30,34,1000)
Bond Price Would be = $ 1120.70
Change in Bond Price = Bond Price Would be - Current Bond Price
Change in Bond Price = 1120.70 - 1000
Change in Bond Price = $ 120.70
Percentage Change in Bond Price = Change in Bond Price/Current Bond Price
Percentage Change in Bond Price = 120.70/1000
Percentage Change in Bond Price = 12.07%
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