Both bond A and bond B have 8.8 percent coupons and are priced at par value. Bon

Question

Both bond A and bond B have 8.8 percent coupons and are priced at par value. Bond A has 9 years to maturity, while bond B has 18 years to maturity. a. If interest rates suddenly rise by 1.4 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 1.4 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

a.

Bond A-8.8% Coupon , Bond-B-8.8% Coupon , Bond A-9 Years to Maturity, Bond-B-18 Years to Maturity

If interest rate is increased by 1.4%:

Existing Price:

Bond A-100

Bond-B-100

Revised Price:

Bond A-92.00

Bond-B-88.00

Prcentage Change in the price of Bond A-                 8   %

Prcentage Change in the price of Bond B-                12   %

b.

If rate of interest is decreased by 1.4%

Existing Price:

Bond A-100

Bond-B-100

Revised Price:

Bond A- 109

Bond-B- 102

Prcentage Change in the price of Bond A-                 9 %

Prcentage Change in the price of Bond B-                 2   %

Workings:

When interest rate is increased by 1.4%

Bond A

Bond-B

If Interest rate is decreased by 1.4%,

Bond-A

109.00

Bond-B

Particulars Amount Discount Factor @ 10.2% Present Value Coupon Payment 8.80 0.91 7.99 Coupon Payment 8.80 0.82 7.25 Coupon Payment 8.80 0.75 6.58 Coupon Payment 8.80 0.68 5.97 Coupon Payment 8.80 0.62 5.41 Coupon Payment 8.80 0.56 4.91 Coupon Payment 8.80 0.51 4.46 Coupon Payment 8.80 0.46 4.05 Coupon Payment 8.80 0.42 3.67 Redemption Bond 100.00 0.42 41.72 Total 92.00

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