Both bond A and bond B have 8.6 percent coupons and are priced at par value. Bon

Question

Both bond A and bond B have 8.6 percent coupons and are priced at par value. Bond A has 8 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? (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 1.2 percent instead, what would be the percentage change in price of bond A and bond B? (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 rise by 1.2 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.)

Explanation / Answer

Answer:

Bond A = the value of the bond without any change in interest rate would be at par = 100

once the interest rate is increased by 1.2 % the alue of the bond would become = 93.551

therefore the change in the bond in % = (100-93.551)/100 = - 6.5%

Bond B = would also fall = (100-90)/100 = -10%

If interest suddenly falls by 1.2% then both the value of the bond A and B would increse

Bond A = (107-100)/100 = 7% increase

Bond B = (111-100)/100 = 11% increase

NOTE: Consider the increase and decrease as total example from 8.6% increase by 1.2 % = 9.8%

Thank You.

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