Both Bond Sam and Bond Dave have 9 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 4 years to maturity, whereas Bond Dave has 18 years to maturity. (Do not round your intermediate calculations.) |
Requirement 1: |
(a) | If interest rates suddenly rise by 5 percent, what is the percentage change in the price of Bond Sam? |
(Click to select) 15.48% -14.91% -17.55% -14.93% 18.33% |
(b) | If interest rates suddenly rise by 5 percent, what is the percentage change in the price of Bond Dave? |
(Click to select) 38.92% -32.59% -48.34% 63.74% -32.57% |
Requirement 2: |
(a) |
If rates were to suddenly fall by 5 percent instead, what would the percentage change in the price of Bond Sam be then? |
(Click to select) -14.88% 18.31% 18.29% 15.48% 18.36% |
(b) |
If rates were to suddenly fall by 5 percent instead, what would the percentage change in the price of Bond Dave be then? |
(Click to select) 63.77% -32.54% 63.72% 63.70% 38.92% |
rev: 09_18_2012
a)
Bond Sam:
If rates suddenly increase by 5%, the new YTM will be = 9% + 5% =14%
Then current price of bond is:
=PV(14%/2,4*2,90/2,1000)
=850.72
Change in price =850.72-1000/1000 = -14.93%
Bond Dave:
If rates suddenly increase by 5%, the new YTM will be = 9% + 5% =14%
Then current price of bond is:
=PV(14%/2,18*2,90/2,1000)
=674.12
Change in price =674.12-1000/1000 = -32.59%
b)
Bond Sam:
If rates suddenly fall by 5%, the new YTM will be = 9% - 5% =4%
Then current price of bond is:
=PV(4%/2,4*2,90/2,1000)
=1183.14
Change in price =1183.14-1000/1000 = 18.31%
Bond Dave:
Then the current price of the bond is:
=PV(4%/2,18*2,90/2,1000)
=1673.22
Change in price =1673.22-1000/1000 = 63.72%
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