Both Bond Bill and Bond Ted have 12.4 percent coupons, make semiannual payments,
ID: 2714884 • Letter: B
Question
Both Bond Bill and Bond Ted have 12.4 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 5 years to maturity, whereas Bond Ted has 22 years to maturity.
Requirement 1: If interest rates suddenly rise by 3 percent, what is the percentage change in the price of these bonds? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places (e.g., 32.16).) Percentage change in price
Bond Bill %
Bond Ted %
Requirement 2: If rates were to suddenly fall by 3 percent instead, what would be the percentage change in the price of these bonds? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Percentage change in price
Bond Bill %
Bond Ted %
Explanation / Answer
Both Bond Bill and Bond Ted have 12.4 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 5 years to maturity, whereas Bond Ted has 22 years to maturity.
If interest rates suddenly rise by 3 percent
Bond Bill
New Bond Value = pv(rate, nper,pmt,fv)
Nper (indicates the semi annual period) = 5*2 = 10
PV (indicates the price) = ?
PMT (indicate the semi annual payment) = 1000*12.4%*1/2 = 62
FV (indicates the face value) = 1000
Rate (indicates Half year YTM) = (12.4+3)*1/2 = 7.7%
New Bond Value = pv( 7.7%,10,62,1000)
New Bond Value = $ 897.97
Percentage change in the price of these bonds = (New Bond Value - Bond Purchase Price)/Bond Purchase Price
Percentage change in the price of these bonds =(897.97-1000)/1000
Percentage change in the price of these bonds = - 10.20%
Bond Ted
New Bond Value = pv(rate, nper,pmt,fv)
Nper (indicates the semi annual period) = 22*2 = 44
PV (indicates the price) = ?
PMT (indicate the semi annual payment) = 1000*12.4%*1/2 = 62
FV (indicates the face value) = 1000
Rate (indicates Half year YTM) = (12.4+3)*1/2 = 7.7%
New Bond Value = pv( 7.7%,44,62,1000)
New Bond Value = $ 812.64
Percentage change in the price of these bonds = (New Bond Value - Bond Purchase Price)/Bond Purchase Price
Percentage change in the price of these bonds =(812.64-1000)/1000
Percentage change in the price of these bonds = - 18.74%
If interest rates suddenly fall by 3 percent
Bond Bill
New Bond Value = pv(rate, nper,pmt,fv)
Nper (indicates the semi annual period) = 5*2 = 10
PV (indicates the price) = ?
PMT (indicate the semi annual payment) = 1000*12.4%*1/2 = 62
FV (indicates the face value) = 1000
Rate (indicates Half year YTM) = (12.4-3)*1/2 = 4.7%
New Bond Value = pv( 4.7%,10,62,1000)
New Bond Value = $ 1117.53
Percentage change in the price of these bonds = (New Bond Value - Bond Purchase Price)/Bond Purchase Price
Percentage change in the price of these bonds =(1117.53-1000)/1000
Percentage change in the price of these bonds = 11.75%
Bond Ted
New Bond Value = pv(rate, nper,pmt,fv)
Nper (indicates the semi annual period) = 22*2 = 44
PV (indicates the price) = ?
PMT (indicate the semi annual payment) = 1000*12.4%*1/2 = 62
FV (indicates the face value) = 1000
Rate (indicates Half year YTM) = (12.4-3)*1/2 = 4.7%
New Bond Value = pv( 4.7%,44,62,1000)
New Bond Value = $ 1276.85
Percentage change in the price of these bonds = (New Bond Value - Bond Purchase Price)/Bond Purchase Price
Percentage change in the price of these bonds =(1276.85-1000)/1000
Percentage change in the price of these bonds = 27.69%
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