Laurel, Inc., and Hardy Corp. both have 13 percent coupon bonds outstanding, wit
ID: 2669161 • Letter: L
Question
Laurel, Inc., and Hardy Corp. both have 13 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has 2 years to maturity, whereas the Hardy Corp. bond has 12 years to maturity. If interest rates suddenly rise by 2 percent, the percentage change in the price of Bonds Laurel, Inc., and Hardy Corp. is ______ percent and _______ percent, respectively. (Negative amounts should be indicated by a minus sign. Do not include the percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16)
Explanation / Answer
Here, par value of the bond is $1,000. Cupon rate is 13%. Coupon payment is 13%*1,000 = 0.13*1,000 = $130. But, here semianually interest payment, the coupon rate will be half. Coupon paymenet is $65 Interest rate are raised by 2% then, YTM is 13+2 = 15% in both cases. Calculation of bond price for Laurel, inc: Here coupon payment is $65. YTM is 15%/2 = 7.5% because semianually. maturity is = 4(2*2) By using excel spread sheet we can calcuate the bond price. Inset PV in formula bar and take the values as, Rate 7.5%, PMT = 65, FV=1,000. By enter we can get the bond value as $966.51 The bond price would fall to $966.51. % of change in bond price is = ($966.51 - $1,000)/$1,000 = (-33.49)/1000 = -3.35 Calcualation of bond price for Hardy corp: YTM is 7.5 Coupon payment is $65 Period to maturity is 24 (12*2) By using excel the bond price is = $922.67 % change in bond price is = (922.67 - $1,000)/$1,000 =-77.33/1000 = -7.73 Therefore, Percentage change in Laurel bond is -3.35 Percentage change in Handy corp is -7.73Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.