Question

Both Bond Sam and Bond Dave have 9 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has three years to maturity, whereas Bond Dave has 16 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? 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?

Answer #1

Bond Sam price at 11% rate=(1000*9%/2)*((1-(1+(11%/2))^(-3*2))/(11%/2))+1000/(1+(11%/2))^6=950.04

Bond Dave price at 11% rate=(1000*9%/2)*((1-(1+(11%/2))^(-16*2))/(11%/2))+1000/(1+(11%/2))^32=850.96

% change in the price of Bond Sam=950.04/1000-1=-5.00%

% change in the price of Bond Dave=850.96/1000-1=-14.90%

Bond Sam price at 7% rate=(1000*9%/2)*((1-(1+(7%/2))^(-3*2))/(7%/2))+1000/(1+(7%/2))^6=1053.29

Bond Dave price at 7% rate=(1000*9%/2)*((1-(1+(7%/2))^(-16*2))/(7%/2))+1000/(1+(7%/2))^32=1190.69

% change in the price of Bond Sam=1053.29/1000-1=5.33%

% change in the price of Bond Dave=1190.69/1000-1=19.07%

the above are answers..

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