Bond J is a 5 percent coupon bond. Bond K is a 11 percent coupon bond. Both bond
ID: 2660699 • Letter: B
Question
Bond J is a 5 percent coupon bond. Bond K is a 11 percent coupon bond. Both bonds have 13 years to maturity, make semiannual payments, and have a YTM of 8 percent.
If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? (Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16)))
What if rates suddenly fall by 2 percent instead? (Round your answers to 2 decimal places. (e.g., 32.16))
Bond J is a 5 percent coupon bond. Bond K is a 11 percent coupon bond. Both bonds have 13 years to maturity, make semiannual payments, and have a YTM of 8 percent.
Explanation / Answer
Hi,
Please find the answer as follows:
Current Prices:
Bond J:
Nper = 13*2 = 26 (indicates the period over which the payments are made)
PMT = 1000*5%*1/2 = 25 (indicates interest payment)
Rate = 8%/2 = 4% (indicates YTM semiannual)
FV = 1000 (indicates par value)
Current Price = PV(Rate,Nper,PMT,FV) = PV(4%,26,25,1000) = 760.26
Bond K:
Nper = 13*2 = 26 (indicates the period over which the payments are made)
PMT = 1000*11%*1/2 = 55 (indicates interest payment)
Rate = 8%/2 = 4% (indicates YTM semiannual)
FV = 1000 (indicates par value)
Current Price = PV(Rate,Nper,PMT,FV) = PV(4%,26,55,1000) = 1239.74
Part A:
Bond J (Revised Prices) = PV(Rate,Nper,PMT,FV) = PV(5%,26,25,1000) = 640.62
Bond K (Revised Prices) = PV(Rate,Nper,PMT,FV) = PV(5%,26,55,1000) = 1071.88
% Change in Price (Bond J) = (640.62 - 760.26)/760.26*100 = -15.74%
% Change in Price (Bond K) = (1071.88 - 1239.74)/1239.74*100 = -13.54%
Part B:
Bond J (Revised Prices) = PV(Rate,Nper,PMT,FV) = PV(3%,26,25,1000) = 910.62
Bond K (Revised Prices) = PV(Rate,Nper,PMT,FV) = PV(3%,26,55,1000) = 1446.92
% Change in Price (Bond J) = (910.62 - 760.26)/760.26*100 = 19.78%
% Change in Price (Bond K) = (1446.92 - 1239.74)/1239.74*100 = 16.71%
Thanks.