Question

1. Table 2

   Bond	Coupon Rate	Maturity (years)
   A	6%	10
   B	6%	5
   C	8%	5

                All three bonds above are currently trading at par value.

   See Table 2 above. Relative to Bond B, for a 200 basis point decrease in the required rate of return, Bond C will most likely exhibit a(n):

   	A.	equal percentage price change
   	B.	greater percentage price change
   	C.	smaller percentage price change
   	D.	no price change

Answer 1

First we have to find the bond prices of B and C using PV function in EXCEL

=PV(rate,nper,pmt,fv,type)

Before decrease in 2% (200 bps) required rate of return, Bond B and C has 6% and 8% returns becasue they were trading at par

Bond B:

rate=8% (6%+2%)

nper=5 years

pmt=coupon payment=(coupon rate*face value)=(6%*1000)=60

fv=face value=1000

=PV(8%,5,60,1000,0)=$920.15

The percentage change in bond B=(1000-920.15)/1000=7.99%

Bond C:

rate=10% (8%+2%)

nper=5 years

pmt=8%*1000=80

fv=1000

=PV(10%,5,80,1000,0)=$924.8

The percentage change in bond C=(1000-924.8)/1000=7.58%

Option C is correct

It is a smaller percentage change.