Question

The Faulk Corp. has a bond with a coupon rate of 5 percent outstanding. The Yoo Company has a bond with a coupon rate of 11 percent outstanding. Both bonds have 14 years to maturity, make semiannual payments, and have a YTM of 8 percent.

If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

What if interest rates suddenly fall by 2 percent instead? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Using the concept of Valuation of Bond ,

Value of Bond(V)=

same cab be calculate by use of PV() function in excel, as PV (effective rate, nper, pmt,fv,type)

		Faulk	YOO
	Face Value	$100	$100
	Annual Coupon Rate	5%	11%
	Annual Required Return	8%	8%
	Years to Maturity	14	14
	Payment Frequency	2	2
		PV(8/2%,14*2,5/2%*100,100)
	Value of Bond (initially)	$75.10	$124.99
question A)	After rise in Interest Rate
	Annual Required Return	10%	10%
	Value of Bond (on rise)	$62.75	$107.45
	% change in price	-16.44%	-14.03%
question b)	After fall in Interest Rate
	Annual Required Return	6%	6%
	Value of Bond (on fall)	$90.62	$146.91
	% change in price	20.67%	17.54%