Question

Problem 10-17

Both bond A and bond B have 6.2 percent coupons and are priced at par value. Bond A has 6 years to maturity, while bond B has 15 years to maturity.

a.	If interest rates suddenly rise by 1 percent, what is the percentage change in price of bond A and bond B? (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

          

Bond A	%
Bond B	%

             

b.	If interest rates suddenly fall by 1 percent instead, what would be the percentage change in price of bond A and bond B? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

               

Bond A	%
Bond B	%

Answer 1

a)

Bond A:

If rates suddenly increase by 1%, the new YTM will be = 7.2%

Then the current price of the bond is:

=PV(7.2%,6,62,1000)

=952.63

Change in price =952.63-1000/1000 = -4.74%

Bond B:

If rates suddenly increase by 1%, the new YTM will be = 7.2%

Then current price of bond is:

=PV(7.2%,15,62,1000)

=910.06

Change in price =910.06-1000/1000 = -8.99%

b)

Bond A:

If rates suddenly fall by 1%, the new YTM will be = 5.2%

Then current price of bond is:

=PV(5.2%,6,62,1000)

=1050.43

Change in price =1050.43-1000/1000 = 5.04%

Bond B:

Then the current price of the bond is:

=PV(5.2%,15,62,1000)

=1102.41

Change in price =1102.41-1000/1000 = 10.24%