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.

If interest rates suddenly rise by 1.2 percent, what is the percentage change in price of bond A and bond 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?

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.

If interest rates suddenly rise by 1.2 percent, what is the percentage change in price of bond A and bond 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?

Explanation / Answer

All Amounts in $ Let us assume the par values of both Bonds A and B as $ 1,000 Given the information as provided in the problem, if the interest rate rises by 1.2%, or goes up to 9.6%, the price of Bond A will be $ 940.802 This will mean a reduction of $ 60 or 6% decrease in the price Bond B will be $ 899.006 This will mean a reduction of $ 101 or 10.1% decrease in the price Further, if the interest rate falls by 1.2%, or goes to 7.2%, the price of Bond A will be $ 1,064.223 This will mean an increase of $ 64 or a 6.4% increase in the price Bond B will be $ 1,118.986 This will mean an increase of $ 118 or a 11.8% increase in the price

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