The Faulk Corp. has a 6 percent coupon bond outstanding. The Gonas Company has a

Question

The Faulk Corp. has a 6 percent coupon bond outstanding. The Gonas Company has a 14 percent bond outstanding. Both bonds have 12 years to maturity, make semiannual payments, and have a YTM of 10 percent. (Do not round intermediate calculations.)

If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds?(Negative amounts should be indicated by a minus sign.Round your answers to 2 decimal places. (e.g., 32.16))

What if interest rates suddenly fall by 2 percent instead? (Round your answers to 2 decimal places. (e.g., 32.16))

The Faulk Corp. has a 6 percent coupon bond outstanding. The Gonas Company has a 14 percent bond outstanding. Both bonds have 12 years to maturity, make semiannual payments, and have a YTM of 10 percent. (Do not round intermediate calculations.)

Explanation / Answer

Calculate the Current Price of Bonds:

The current price of bonds can be calculated with the use of Present Value function/formula of EXCEL/Financial Calculator. The function/formula for calculating PV is PV(Rate,Nper,PMT,FV) where Rate = Yield to Maturity, Nper =Period, PMT = Interest Payment and FV = Face Value

_______________

Faulk Corporation:

Here, Rate = 10%/2= 5%, Nper = 12*2 = 24, PMT = $1,000*6%*1/2= $30 and FV = $1,000 [we use 2 because the bond is semi-annual]

Using these values in the above function/formula for PV, we get,

Current Price of Bond = PV(5%,24,30,1000) = $724.03

_______________

Gonas Company:

Here, Rate = 10%/2= 5%, Nper = 12*2 = 24, PMT = $1,000*14%*1/2= $70 and FV = $1,000 [we use 2 because the bond is semi-annual]

Using these values in the above function/formula for PV, we get,

Current Price of Bond = PV(5%,24,70,1000) = $1,275.97

_____________

Part A)

Increase in interest rates indicate increase in yield to maturity. We will have to calculate the revised prices with the increase of 2%.

_____________

Faulk Corporation:

Here, Rate = (10% +2%)/2= 6%, Nper = 12*2 = 24, PMT = $1,000*6%*1/2= $30 and FV = $1,000 [we use 2 because the bond is semi-annual]

Using these values in the above function/formula for PV, we get,

Price of Bond = PV(6%,24,30,1000) = $623.49

Percentage Change in Price = (Revised Price - Original Price)/Revised Price*100 = (623.49 - 724.03)/724.03*100 = -13.89%

_______________

Gonas Company:

Here, Rate = (10%+2%)/2= 5%, Nper = 12*2 = 24, PMT = $1,000*14%*1/2= $70 and FV = $1,000 [we use 2 because the bond is semi-annual]

Using these values in the above function/formula for PV, we get,

Price of Bond = PV(6%,24,70,1000) = $1,125.50

Percentage Change in Price = (Revised Price - Original Price)/Revised Price*100 = (1,125.50 - 1,275.97)/1,275.97*100 = -11.79%

_____________

Part B)

Decrease in interest rates indicate decrease in yield to maturity. We will have to calculate the revised prices with the decrease of 2%.

_____________

Faulk Corporation:

Here, Rate = (10%-2%)/2= 4%, Nper = 12*2 = 24, PMT = $1,000*6%*1/2= $30 and FV = $1,000 [we use 2 because the bond is semi-annual]

Using these values in the above function/formula for PV, we get,

Price of Bond = PV(4%,24,30,1000) = $847.53

Percentage Change in Price = (Revised Price - Original Price)/Revised Price*100 = (847.53 - 724.03)/724.03*100 = 17.06%

_______________

Gonas Company:

Here, Rate = (10%-2%)/2= 4%, Nper = 12*2 = 24, PMT = $1,000*14%*1/2= $70 and FV = $1,000 [we use 2 because the bond is semi-annual]

Using these values in the above function/formula for PV, we get,

Price of Bond = PV(4%,24,70,1000) = $1,457.41

Percentage Change in Price = (Revised Price - Original Price)/Revised Price*100 = (1,457.41 - 1,275.97)/1,275.97*100 = 14.22%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.