Both Bond Sam and Bond Dave have 7 percent coupons, make semiannual payments, an
ID: 2820014 • Letter: B
Question
Both Bond Sam and Bond Dave have 7 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has six years to maturity, whereas Bond Dave has 19 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam and Bond Dave? (Negative amounts 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 Bond Sam Percentage change in price of Bond Dave 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.g. 32.16.) Percentage change in price of Bond Sam Percentage change in price of Bond DaveExplanation / Answer
It has semi Annual Payments.
Lets Assume Bond price be $1000.
SemiAnnual Coupon Payments = 1000 * 7% /2 = $35
YTM = 7%
n = 6yrs * 2 = 12
If interest rate suddenly rise by 2%.
The Yield is now increased to 7%+2% = 9%
We Can solve it through Excel sheet with the following formula
New Bond Price for Bond Sam = PV(9%/2,6*2, 35,1000,0) = $908.81
New Bond Price for Bond Dave:
Everything else witll remain same except time to maturity is now 18 * 2
New Bond Price for Bond Dave = PV(9%/2,19*2, 35,1000,0) = $ 819.50
%age change in Bond Sam = $908.81/1000 -1 = -9.12%
%age change in Bond Dave = $ 819.50/1000 - 1 = -18.05%
If the rates fall by 2%
New YTM = 7% - 2% = 5%
New Bond Price for Bond Sam = PV(5%/2,6*2, 35,1000,0) = $1,102.58
New Bond Price for Bond Dave = PV(5%/2,19*2, 35,1000,0) = $ 1,243.50
%age change in Bond Sam = $1,102.58/1000 -1 = 10.26%
%age change in Bond Dave = $ 1,243.50/1000 - 1 = 24%
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