AT&T; LTE 12:37 PM ezto.mheducation.com E connect nance Fall Homework #04-Ch 08
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AT&T; LTE 12:37 PM ezto.mheducation.com E connect nance Fall Homework #04-Ch 08 Question 1 (or 5.00 points Laurel, Inc., and Hardy Corp. both have 6 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has five years to maturity, whereas the Hardy Corp. bond has 18 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16) Percentage change in price of Laurel Percernage change in price of Hardy If interest rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of these bonds be then? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Percentage change in price of Laul Percentage change in price of Hardy HintsReferenceseook&Resources;Explanation / Answer
If interest rates suddenly rise by 2%
Price of Laurel = $30* 8.1109 (PVIFA of 4% for 10 periods) + $1000 * 0.6756 (PVIF of 4% for 10 periods)
= $243.327 + $675.6
= $918.927
Price of Hardy = $30 *18.908 (PVIFA of 4% for 36 periods) + $1000 *0.2437 (PVIF of 4% for 36 periods)
= $567.24 + $243.7
= $810.94
Percentage change in price of Laurel = ($918.927 - $1000) / $1000
= - 8.1073%
Percentage change in price of Hardy = ($810.94 - $1000) / $1000
= - 18.906%
If interest rate fall by 2%
Price of Laurel = $30 * 8.9826(PVIFA of 2% for 10 periods + $1000 * 0.8203(PVIF of 2% for 10 periods)
= $269.478 + $820.3
= $1089.778
Price of Hardy = $30 * 25.489(PVIFA of 2% for 36 periods + $1000 * 0.4902 (PVIF of 2% for 36 periods)
= $764.67 + $490.2
= $1254.87
Percentage change in price of Laurel = $1089.778 - $1000 / $1000
= 8.9778%
Percentage change in price of Hardy = $1254.87 - $1000 / $1000
= 25.487%.
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