BVA Inc. has two bond issues outstanding, each with a par value of $1,000 inform
ID: 2776940 • Letter: B
Question
BVA Inc. has two bond issues outstanding, each with a par value of $1,000 information about each is listed below. Suppose market interest rates rise 1 percentage point across the yield curve. What will be the change in price for each of the bonds? Does this yell us anything about the relationship between initial yield to maturity and interest rate risk?
Bond A: 12 years to maturity, pays a 7% coupon, and the market interest rate on this BB-rated bond is 12.36%
Bond B: 12 years to maturity, pays a 7% coupon, and the market interest rate on this A-rated bond is 10.25%
Explanation / Answer
Year 1 2 3 4 5 6 7 8 9 10 11 12 Cash Flow 70 70 70 70 70 70 70 70 70 70 70 1070 BB Rated Bond with Market Rate = 12.36% Discount Factor 0.89 0.79 0.70 0.63 0.56 0.50 0.44 0.39 0.35 0.31 0.28 0.25 Discounted CF 62.30 55.45 49.35 43.92 39.09 34.79 30.96 27.56 24.52 21.83 19.43 264.27 Price of Bond 673.45 Incase Interest Rates increases by 1% Discount Factor 0.88 0.78 0.69 0.61 0.53 0.47 0.42 0.37 0.32 0.29 0.25 0.22 Discounted CF 61.75 54.47 48.05 42.39 37.39 32.99 29.10 25.67 22.64 19.98 17.62 237.61 Price of Bond 629.67 Change in Price of Bond 43.78 A Rated Bond with Market Rate = 10.25% Discount Factor 0.91 0.82 0.75 0.68 0.61 0.56 0.51 0.46 0.42 0.38 0.34 0.31 Discounted CF 63.49 57.59 52.24 47.38 42.97 38.98 35.35 32.07 29.09 26.38 23.93 331.77 Price of Bond 781.24 Incase Interest Rates increases by 1% Discount Factor 0.90 0.81 0.73 0.65 0.59 0.53 0.47 0.43 0.38 0.34 0.31 0.28 Discounted CF 62.92 56.56 50.84 45.70 41.08 36.92 33.19 29.83 26.82 24.10 21.67 297.70 Price of Bond 727.33 Change in Price of Bond 53.91
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