Question

ABC is a 4% coupon bond. Bond XYZ is a 10% coupon bond. Both bonds have 8 years to maturity and make half-yearly coupon payments. They are currently priced at par value. If interest rates fall by 1.5%, what are the new bond prices for Bond ABC and XYZ respectively? Assume par value per bond is $1000.

a.Price for Bond ABC=$1,120.22; Price for Bond XYZ=$1,093.04

b.None of the answers are correct

c.Price for Bond ABC=$1,120.22; Price for Bond XYZ=$1,085.80

d.Price for Bond ABC=$1,108.15; Price for Bond XYZ=$1,085.80

e.Price for Bond ABC=$1,108.15; Price for Bond XYZ=$1,093.04

Answer 1

Both the bonds are valued at par, which means their YTM will be same as the their Coupon

Value of ABC Bond =

Where r is the discounting rate of a compounding period i.e. (4-1.5)% / 2 = 0.0125

And n is the no of Compounding periods 8 years * 2 = 16

Coupon 4% / 2 = 0.02

=

= 1108.15

Value of XYZ Bond =

Where r is the discounting rate of a compounding period i.e. (10-1.5)% / 2 = 0.0425

And n is the no of Compounding periods 8 years * 2 = 16

Coupon 10% / 2 = 0.05

=

= 1085.80

Option d is correct.