Both bond A and bond B have 9.2 percent coupons and are priced at par value. Bon

Question

Both bond A and bond B have 9.2 percent coupons and are priced at par value. Bond A has 6 years to maturity, while bond B has 20 years to maturity.

If interest rates suddenly rise by 1.8 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 1.8 percent instead, what would be the percentage change in price of bond A and bond B?

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Both bond A and bond B have 9.2 percent coupons and are priced at par value. Bond A has 6 years to maturity, while bond B has 20 years to maturity.

Explanation / Answer

For Bond A Let's suppose Par value of bond is 100 Time cash flow present value @9.2% present value of cash flow present value *time 1 9.2 0.924214 8.502773 8.502773 2 9.2 0.854172 7.858385 15.71677 3 9.2 0.789438 7.262833 21.7885 4 9.2 0.72961 6.712415 26.84966 5 9.2 0.674316 6.203711 31.01855 6 109.2 0.623213 68.05485 408.3291 sum of present value*time 512.2053 Duration of the bond present value *time / purchase price of bond 5.122053 % change in bond value Duration*change in interest rate 9.219696 percent % changein bond price is interest rates decline by 1.8% Duration*change in interest rate -9.2197 percent For Bond B Let's suppose Par value of bond is 100 Time cash flow present value @9.2% present value *time 1 9.2 0.915751 8.424908 8.424908 2 9.2 0.8386 7.715118 15.43024 3 9.2 0.767948 7.065126 21.19538 4 9.2 0.70325 6.469896 25.87958 5 9.2 0.644001 5.924813 29.62406 6 9.2 0.589745 5.425653 32.55392 7 9.2 0.540059 4.968547 34.77983 8 9.2 0.49456 4.549951 36.39961 9 9.2 0.452894 4.166622 37.4996 10 9.2 0.414738 3.815588 38.15588 percent 11 9.2 0.379797 3.494128 38.43541 12 9.2 0.347799 3.199751 38.39701 13 9.2 0.318497 2.930175 38.09227 14 9.2 0.291664 2.68331 37.56634 15 9.2 0.267092 2.457244 36.85866 16 9.2 0.244589 2.250223 36.00357 17 9.2 0.223983 2.060644 35.03095 18 9.2 0.205113 1.887037 33.96666 19 9.2 0.187832 1.728056 32.83306 20 109.2 0.172007 18.78321 375.6642 sum of present value*time 982.7912 Duration of the bond present value *time / purchase price of bond 9.827912 % change in bond value Duration*change in interest rate 17.69024 percent % change in bond value if interest rate decreases by 1.8% -17.6902 percent

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