Q4. Both Bond Bill and Bond ted has 7% coupons, make annual payments, and are pr
ID: 2799480 • Letter: Q
Question
Q4. Both Bond Bill and Bond ted has 7% coupons, make annual payments, and are priced at par(-1000). Bond Bill has 3 years to maturity, whereas Bond Ted as 20 years to maturity. If interest rate suddenly rise by 2% annually, what is percentage change in the price of Bond Bill? Of Bond Ted? RATE NPER PMT PV FV TYPE function answerNew price Bill, rate increase by 2% Ted, rate increase by 2% ??2 PV PV Bond Bill: price change from 1000 to ?? Bond Ted: price change from 1000 to ?? Which has a higher percentage change in price? Why?Explanation / Answer
Price of Bill bond now = 1000
Price of ted Bond now = 1000
As they are priced at par, they must have ytm equal to coupon rate that is 7%
After rates change,
Price of Bill bond=70/1.09+70/1.09^2+70/1.09^3+1000/1.09^3=949.3741
%change in price of Bill bond=(949.3741-1000)/1000=-5.063%
Price of Ted bond=70/1.09+70/1.09^2..............70/1.09^20+1000/1.09^20=70/0.09*(1-1/1.09^20)+1000/1.09^20=817.4291
%change in price of Ted bond=(817.4291-1000)/1000=-18.257%
Ted has higher percentage change in price because it has higher duration or interest rate sensitivity..Higher the maturity higher is the duration and Ted bond has higher maturity thus has higher duration
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