Both Bond Sam and Bond Dave have 6 percent coupons, make semiannual payments and
ID: 2808334 • Letter: B
Question
Both Bond Sam and Bond Dave have 6 percent coupons, make semiannual payments and are priced at par value. Bond Sam has four years to maturity, whereas Bond Dave has 19 years to maturity a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam and Bond Dave? (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.) b. If rates were to suddenly fall by 2 percent instead, what would be the percentage change in the price of Bond Sam and Bond Dave? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.9, 32.16.) a. Bond Sam Bond Dave b. Bond Sam Bond DaveExplanation / Answer
Explanation with calculations as needed.
Question - a
Current ......... YTM = 6%. Because, bonds are acquired at par value means we have coupon = YTM
New YTM = 6 + 2 = 8%
BOND SAM
Price of the bond ( NEW ) = 30 * [ 1 - (1.04)-8 ] / 0.04 + 1000 * (1.04)-8
= 201.98 + 730.69 = 932.67
Percentage change = ( 1000 - 932.67 ) / 1000 * 100 = - 6.73%
BOND DAVE
Price of the bond ( NEW ) = 30 * [ 1 - (1.04)-38 ] / 0.04 + 1000 * (1.04)-38
= 581.03 + 225.28 = 806.31
Percentage change = ( 806.31 - 1000 ) / 1000 * 100 = - 19.37 %
Question - b
BOND SAM
Price of the bond ( NEW ) = 30 * [ 1 - (1.02)-8 ] / 0.02 + 1000 * (1.02)-8
= 219.76 + 853.49 = 1073.25
Percentage change = ( 1073.25 - 1000 ) / 1000 * 100 = 7.33 %
BOND DAVE
Price of the bond ( NEW ) = 30 * [ 1 - (1.02)-38 ] / 0.02 + 1000 * (1.02)-38
= 793.22 + 471.18 = 1264.4
Percentage change = ( 1264.4 - 1000 ) / 1000 * 100 = 26.44 %
a Bond Sam -6.73 % Bond Dave -19.37 % b Bond sam 7.33 % Bond Dave 26.44 %Related Questions
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