Bond Wall-E is a 4 percent coupon bond. Bond EVE is a 10 percent coupon bond. Bo
ID: 2730581 • Letter: B
Question
Bond Wall-E is a 4 percent coupon bond. Bond EVE is a 10 percent coupon bond. Both bonds have 13 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))) Percentage change in price of Bond Wall-E % Percentage change in price of Bond EVE % What if rates suddenly fall by 2 percent instead? (Round your answers to 2 decimal places. (e.g., 32.16)) Percentage change in price of Bond Wall-E % Percentage change in price of Bond EVE %
Explanation / Answer
Original Price of Bond Wall-E = $20 * PVIFA(3.50%,26period) + $1000 * PVIF(3.50%,26period)
= $20 * 16.8904 + $1000 * 0.4088 = $746.61
Original Price of Bond EVE = $50 * PVIFA(3.50%,26period) + $1000 * PVIF(3.50%,26period)
= $50 * 16.8904 + $1000 * 0.4088 = $1253.32
IF INTEREST RATES RISE BY 2%TO 6% (for Wall-E) and 12% (for EVE),
Changed Price of Bond Wall-E = $30 * PVIFA(3.50%,26period) + $1000 * PVIF(3.50%,26period)
= $30 * 16.8904 + $1000 * 0.4088 = $915.51
Changed Price of Bond EVE = $60 * PVIFA(3.50%,26period) + $1000 * PVIF(3.50%,26period)
= $60 * 16.8904 + $1000 * 0.4088 = $1422.22
Percentage change in price of Bond Wall-E = ($915.51 - $746.61) / $746.61 = 22.62%
Percentage change in price of Bond EVE = ($1422.22 - $1253.32) / $1253.32 = 13.48%
IF INTEREST RATES FALL BY 2%TO 2% (for Wall-E) and 8% (for EVE),
Changed Price of Bond Wall-E = $10 * PVIFA(3.50%,26period) + $1000 * PVIF(3.50%,26period)
= $10 * 16.8904 + $1000 * 0.4088 = $577.70
Changed Price of Bond EVE = $40 * PVIFA(3.50%,26period) + $1000 * PVIF(3.50%,26period)
= $40 * 16.8904 + $1000 * 0.4088 = $1084.42
Percentage change in price of Bond Wall-E = ($577.70 - $746.61) / $746.61 = -22.62%
Percentage change in price of Bond EVE = ($1084.42 - $1253.32) / $1253.32 = -13.48%