Bond J is a 4 percent coupon bond. Bond K is a 10 percent coupon bond. Both bond
ID: 2660741 • Letter: B
Question
Bond J is a 4 percent coupon bond. Bond K is a 10 percent coupon bond. Both bonds have 12 years to maturity, make semiannual payments, and have a YTM of 7 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 4 percent coupon bond. Bond K is a 10 percent coupon bond. Both bonds have 12 years to maturity, make semiannual payments, and have a YTM of 7 percent.
Explanation / Answer
initial price of bond J =PV(0.035,24,20,1000)
=$759.12
initial price of bond K = PV(0.035,24,50,1000)
=$1240.88
so if r increase by 2%
price of bond J =PV( 0.045,24,20,1000)
=$637.61
so percentage change for bond J = (637.61-759.12)/759.12
= -16.0006%
= -16%
Fianl price for K = PV(0.045,24,50,1000)
=$1072.48
so percentage change = (1072.48-1240.88)/1240.88
= -13.57%
so final answer for Part A) percentage change for bond J = -16% ( negative sign)
percentage change for bond K = -13.57% (negative sign)
so if r decrease by 2%
price of bond J =PV( 0.025,24,20,1000)
=$910.58
so percentage change for bond J = (910.58-759.12)/759.12
= 19.95%
Fianl price for K = PV(0.025,24,50,1000)
=$1447.12
so percentage change = (1447.12-1240.88)/1240.88
= 16.62%
so final answer for Part B) percentage change for bond J = 19.95% ( positive sign)
percentage change for bond K = 16.62%% (positive sign)