Laurel, Inc., and Hardy Corp. both have 7 percent coupon bonds outstanding, with
ID: 2785883 • Letter: L
Question
Laurel, Inc., and Hardy Corp. both have 7 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has four years to maturity, whereas the Hardy Corp. bond has 15 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 %
Percentage 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 Laurel %
Percentage change in price of Hardy %
Explanation / Answer
Semi Annual Coupon Rate = 3.5%
Semi Annual Coupon Payment = 35
As PV of both of Laurel and Hardy bond are 1,000 as it is par bond
Case 1 - Interest Rise by 2% and become 9%
Laurel:
Number of semi annual periods to maturity = 8
Interst Rate = 4.5%
FV = 1,000
PMT = 35
Using Financial Calculator:
PV = 934.04
Change in Price = (934.04 - 1,000)/ 1,000
Change in Price = -6.60%
Hardy:
Number of semi annual periods to maturity = 30
Interst Rate = 4.5%
FV = 1,000
PMT = 35
Using Financial Calculator:
PV = 837.11
Change in Price = (837.11 - 1,000)/ 1,000
Change in Price = -16.29%
Case 2 - Interest decrease by 2% and become 5%
Laurel:
Number of semi annual periods to maturity = 8
Interst Rate = 2.5%
FV = 1,000
PMT = 35
Using Financial Calculator:
PV = 1,071.70
Change in Price = (1071.70 - 1,000)/ 1,000
Change in Price = 7.17%
Hardy:
Number of semi annual periods to maturity = 30
Interst Rate = 2.5%
FV = 1,000
PMT = 35
Using Financial Calculator:
PV = 1,209.30
Change in Price = (1209.30 - 1,000)/ 1,000
Change in Price = 20.93%
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