Both bond A and bond B have 6.2 percent coupons and are priced at par value. Bon
ID: 2745088 • Letter: B
Question
Both bond A and bond B have 6.2 percent coupons and are priced at par value. Bond A has 6 years to maturity, while bond B has 15 years to maturity.
Assume if interest rates suddenly rise by 1 percent, what is the percentage change in price of bond A and bond B? (Round your answer to 2 decimal places. Negative answers should be indicated by a minus sign. Omit the "%" sign in your response.)
Assume if interest rates suddenly fall by 1 percent instead, what would the percentage change in price of bond A and bond B? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)
a)
Assume if interest rates suddenly rise by 1 percent, what is the percentage change in price of bond A and bond B? (Round your answer to 2 decimal places. Negative answers should be indicated by a minus sign. Omit the "%" sign in your response.)
Explanation / Answer
Bond A is selling at par. Then the YTM is 6.2%
Bond B is selling at par. Then the YTM is 6.2%.
Answer 1.
If the YTM rise to 7.2%
Then,
The price of Bond A = 62*(1-(1/1.072)^6)/0.072 + 1,000/1.072^6
The price of Bond A = $952.63
Percentage Change = (952.63-1,000)/1,000
Percentage Change = 4.74% Decrease
The price of Bond B = 62*(1-(1/1.072)^15)/0.072 + 1,000/1.072^15
The price of Bond A = $910.06
Percentage Change = (910.06-1,000)/1,000
Percentage Change = 8.99% Decrease
Answer 2.
If the YTM rise to 5.2%
Then,
The price of Bond A = 62*(1-(1/1.052)^6)/0.072 + 1,000/1.052^6
The price of Bond A = $1,050.40
Percentage Change = (1,050.40-1,000)/1,000
Percentage Change = 5.04% Increase
The price of Bond B = 62*(1-(1/1.052)^15)/0.072 + 1,000/1.052^15
The price of Bond A = $1,102.40
Percentage Change = (1,102.40-1,000)/1,000
Percentage Change = 10.24% Increase
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