Both Bond Sam and Bond Dave have 10 percent coupons, make semiannual payments, a

Question

Both Bond Sam and Bond Dave have 10 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 3 years to maturity, whereas Bond Dave has 17 years to maturity. (Do not round your intermediate calculations.) Requirement 1: (a) If interest rates suddenly rise by 4 percent, what is the percentage change in the price of Bond Sam? (Click to select) 4 (b) If interest rates suddenly rise by 4 percent, what is the percentage change in the price of Bond Dave? (Click to select) A Requirement 2: (a) If rates were to suddenly fall by 4 percent instead, what would the percentage change in the price of Bond Sam be then? (Click to select) A (b) If rates were to suddenly fall by 4 percent instead, what would the percentage change in the price of Bond Dave be then? (Click to select)+

Explanation / Answer

Requirement 1:

a

For Bond Sam

Using financial calculator BA II Plus - Input details:

Rise by 4%

I/Y = Rate or yield / frequency of coupon in a year = (10+4)/2

7.00

PMT = Payment = Coupon / frequency of coupon =

-$50.00

N = Total number of periods = Years x frequency of coupon =

6

FV = Future Value =

-$1,000.00

CPT > PV = Bond Value =

$904.67

Requirement 1:

b

For Bond Dave

Using financial calculator BA II Plus - Input details:

Rise by 4%

I/Y = Rate or yield / frequency of coupon in a year = (10+4)/2

7.00

PMT = Payment = Coupon / frequency of coupon =

-$50.00

N = Total number of periods = Years x frequency of coupon =

34

FV = Future Value =

-$1,000.00

CPT > PV = Bond Value =

$742.92

Requirement 2:

b

For Bond Sam

Using financial calculator BA II Plus - Input details:

Fall by 4%

I/Y = Rate or yield / frequency of coupon in a year = (10-4)/2

3.00

PMT = Payment = Coupon / frequency of coupon =

-$50.00

N = Total number of periods = Years x frequency of coupon =

6

FV = Future Value =

-$1,000.00

CPT > PV = Bond Value =

$1,108.34

Requirement 2:

b

For Bond Dave

Using financial calculator BA II Plus - Input details:

Fall by 4%

I/Y = Rate or yield / frequency of coupon in a year = (10-4)/2

3.00

PMT = Payment = Coupon / frequency of coupon =

-$50.00

N = Total number of periods = Years x frequency of coupon =

34

FV = Future Value =

-$1,000.00

CPT > PV = Bond Value =

$1,422.64

For Bond Sam

Using financial calculator BA II Plus - Input details:

Rise by 4%

I/Y = Rate or yield / frequency of coupon in a year = (10+4)/2

7.00

PMT = Payment = Coupon / frequency of coupon =

-$50.00

N = Total number of periods = Years x frequency of coupon =

6

FV = Future Value =

-$1,000.00

CPT > PV = Bond Value =

$904.67

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