Question

Both Bond Sam and Bond Dave have 9 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 5 years to maturity, whereas Bond Dave has 11 years to maturity. If interest rates suddenly rise by 4 percent, what is the percentage change in the price of Bond Sam? If interest rates suddenly rise by 4 percent, what is the percentage change in the price of Bond Dave? If rates were to suddenly fall by 4 percent instead, what would the percentage change in the price of Bond Sam be then? If rates were to suddenly fall by 4 percent instead, what would the percentage change in the price of Bond Dave be then? Next Visit question mapQuestion 15 of 21 Total 15 of 21 Prev

Answer 1

a)

Bond Sam:

If rates suddenly increase by 4%, the new YTM will be = 9% + 4% =13%

Then current price of bond is:

=PV(13%/2,5*2,90/2,1000)

=856.22

Change in price =856.22-1000/1000 = -14.38%

Bond Dave:

If rates suddenly increase by 4%, the new YTM will be = 9% + 4% =13%

Then current price of bond is:

=PV(13%/2,11*2,90/2,1000)

=769.30

Change in price =819.50-1000/1000 = -23.07%

b)

Bond Sam:

If rates suddenly fall by 4%, the new YTM will be = 9% - 4% =5%

Then current price of bond is:

=PV(5%/2,5*2,90/2,1000)

=1175.04

Change in price =1175.04-1000/1000 = 17.50%

Bond Dave:

Then the current price of the bond is:

=PV(5%/2,11*2,90/2,1000)

=1335.31

Change in price =1335.31-1000/1000 = 33.53%