Bond J is a 5 percent coupon bond. Bond K is a 8 percent coupon bond. Both bonds
ID: 2632701 • Letter: B
Question
Bond J is a 5 percent coupon bond. Bond K is a 8 percent coupon bond. Both bonds have 7 years to maturity, make semiannual payments, and have a YTM of 8 percent. Requirement 1: (a) If interest rates suddenly rise by 5 percent, what is the percentage price change of Bond J? (b) If interest rates suddenly rise by 5 percent, what is the percentage price change of Bond K? Requirement 2: (a) If interest rates suddenly fall by 5 percent, what is the percentage price change of Bond J? (b) If interest rates suddenly fall by 5 percent, what is the percentage price change of Bond K?
Staind, Inc., has 7 percent coupon bonds on the market that have 13 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 10 percent, what is the current bond price?
Staind, Inc., has 7 percent coupon bonds on the market that have 13 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 10 percent, what is the current bond price?
Explanation / Answer
bond J
price = 25 * [ 1- (1+0.04)^-14]/0.04 + 1000/1.04^14 = 841.55
bond K
price = 40 * [ 1- (1+0.04)^-14]/0.04 + 1000/1.04^14 = 1000
a)
when interest rate rise by 5 percent
bond J
price = 25 * [ 1- (1+0.065)^-14]/0.065 + 1000/1.065^14 = 639.45
perecentage change of bond J = 639.45 - 841.55/841.55 = - 24.02%
b)
bond K
price = 40 * [ 1- (1+0.065)^-14]/0.065 + 1000/1.065^14 = 774.65
percentage change of bond K = 774.65 - 1000/1000 = - 22.54%
requirement 2:
when interest rate fall by 5 percent
bond J
price = 25 * [ 1- (1+0.015)^-14]/0.015 + 1000/1.015^14 = 1125.43
perecentage change of bond J = 1125.43 - 841.55/841.55 = 33.73%
bond K
price = 40 * [ 1- (1+0.015)^-14]/0.015 + 1000/1.015^14 = 1313.59
percentage change of bond K = 1313.59 - 1000/1000 = 31.36%
2)
price = 70 * [ 1- (1+0.1)^-13]/0.1 + 1000/1.1^13 = 786.90