Both Bond A and Bond B have 7.2 percent coupons and are priced at par value. Bon

Question

Both Bond A and Bond B have 7.2 percent coupons and are priced at par value. Bond A has 9 years to maturity, while Bond B has 15 years to maturity. If interest rates suddenly rise by 2 percentage points, what is the difference in percentage changes in prices of Bond A and Bond B? (i.e., Bond A - Bond B). The bonds pay coupons twice a year. (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Please show all work and/or how to get the answer by using the BAII Plus calculator

Explanation / Answer

Bond A price at 9.2% after 2% increase

=(1000*7.2%/2)*((1-(1+(9.2%/2))^(-9*2))/(9.2%/2))+1000/(1+(9.2%/2))^(9*2)

=879.3633

% change in bond A =(879.3633/1000)-1=-12.06%

Bond B price at 9.2% after 2% increase

=(1000*7.2%/2)*((1-(1+(9.2%/2))^(-15*2))/(9.2%/2))+1000/(1+(9.2%/2))^(15*2)

=839.0103

% change in bond B =(839.0103/1000)-1=-16.10%

difference in percentage changes in prices of Bond A and Bond B=-12.06%-(-16.10%)=4.04%

it can be shown other way as difference in percentage changes in prices of Bond A and Bond B=12.06%-16.10%=-4.04%

the above is the answer

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