Question

Both Bond Sam and Bond Dave have 9 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 2 years to maturity, whereas Bond Dave has 14 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?

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%/2,2*2,90/2,1000)

=931.48

Change in price =931.48-1000/1000 = -6.85

Bond Dave:

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

Then current price of bond is:

=PV(13%/2,9*2,90/2,1000)

=791.35

Change in price =791.35-1000/1000 = -20.86%

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%/2,2*2,90/2,1000)

=1075.24

Change in price =1075.24-1000/1000 = 7.52%

Bond Dave:

Then the current price of the bond is:

=PV(5%/2,14*2,90/2,1000)

=1399.30

Change in price =1399.30-1000/1000 = 39.93%