Both bond A and bond B have 9.6 percent coupons and are priced at par value. Bon

Question

Both bond A and bond B have 9.6 percent coupons and are priced at par value. Bond A has 8 years to maturity, while bond B has 20 years to maturity.

If interest rates suddenly rise by 2.2 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.)

If interest rates suddenly fall by 2.2 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.)

Both bond A and bond B have 9.6 percent coupons and are priced at par value. Bond A has 8 years to maturity, while bond B has 20 years to maturity.

Explanation / Answer

COUPON RATE=9.6%

LET PAR VALUE=100

YEARS TO MATURITY FOR BOND A=8 YEARS

FOR BOND B=20 YEARS

CURRENT PRICE OF BOND=COUPON AMOUNT *PVIFA(DISCOUNT RATE,YEARS TO MATURITY)+MATURITY VALUE*PVIF(DISCOUNT RATE,YEARS TO MATURITY)

CURRENT PRICE OF BOTH BONDS=100

LET DISCOUNT RATE=R

SO,FOR BOND A

100=9.6PVIFA(R,8)+100PVIF(R,8)

FOR BOND B

100=9.6PVIFA(R,20)+100PVIF(R,20)

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