Both Bond Sam and Bond Dave have 6 percent coupons, make semiannual payments, an

Question

Both Bond Sam and Bond Dave have 6 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has five years to maturity, whereas Bond Dave has 18 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? (Round your answers to 2 decimal places. (e.g., 32.16))

Both Bond Sam and Bond Dave have 6 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has five years to maturity, whereas Bond Dave has 18 years to maturity.

Explanation / Answer

Let the face value of bonds be $100

Yield to maturity at Bond Sam = 6%

Yield to maturity at Bond Dave= 6%

A 2% increase

PV of Bond Sam = $ 91.88 %change = - 8.11%

PV of Bond Dave = $ 81.09 % change = -18.9%

A 2% decrease

PV of Bond Sam = $ 108.98 %change = 8.98%

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