Question

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

Answer 1

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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