Both bond A and bond B have 8.4 percent coupons and are priced at par value. Bon

Question

Both bond A and bond B have 8.4 percent coupons and are priced at par value. Bond A has 7 years to maturity, while bond B has 18 years to maturity. a. If interest rates suddenly rise by 1.2 percent, what is the percentage change in price of bond A and bond B? (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.) Bond A % Bond B % b. If interest rates suddenly fall by 1.2 percent instead, what would be the percentage change in price of bond A and bond B? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.) Bond A % Bond B %

Explanation / Answer

Bond A

Bond B

Working Note (Bond A)

Bond B

Bond Price B0= (Annual Interest*(PVIFA Required return,n))+(Maturity Value*(PVIF Required return,n)) Face Value (Assume) 1000 1000 Coupon Rate 6.6% 6.6% Annual Interest 66 66 Years to maturity 8 15 YTM 6.6% 6.6% YTM: (6.6%+1.2%) 7.8% 7.8% YTM: (6.6%-1.2%) 5.4% 5.4% Bond Price B0= (66*(PVIFA 6.6%,8years))+(1000*(PVIF 6.6%,8 years)) Bond Price B0=(66*6.065 )+(1000*0.5997) Bond Price B0= 1000 Bond Price B0= (66*(PVIFA 7.8%,8years))+(1000*(PVIF 7.8%,8 years)) Bond Price B0=(66*5.7904 )+(1000*0.5483) Bond Price B0= 930.47 % Chanage in Bond Price= (930.47-1000)/1000 -6.95% Bond Price B0= (66*(PVIFA 5.4%,8years))+(1000*(PVIF 5.4%,8 years)) Bond Price B0=(66*6.3601 )+(1000*0.6566) Bond Price B0= 1076.37 % Chanage in Bond Price= (1076.37-1000)/1000 7.64%

Bond B

Bond Price B0= (66*(PVIFA 6.6%,15years))+(1000*(PVIF 6.6%,15 years)) Bond Price B0=(66*9.3426 )+(1000*0.3834) Bond Price B0= 1000 Bond Price B0= (66*(PVIFA 7.8%,15years))+(1000*(PVIF 7.8%,15 years)) Bond Price B0=(66*18.6649 )+(1000*0.3241) Bond Price B0=895.98 % Chanage in Bond Price= (895.98-1000)/1000 -10.40% Bond Price B0= (66*(PVIFA 5.4%,15years))+(1000*(PVIF 5.4%,15 years)) Bond Price B0=(66*10.1047 )+(1000*0.4544) Bond Price B0= 1121.31 % Chanage in Bond Price= (1121.31-1000)/1000 12.13%

Working Note (Bond A)

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