Bond J has a coupon rate of 5.5 percent Bond S has a coupon rate of 15.5 percent
ID: 2760862 • Letter: B
Question
Bond J has a coupon rate of 5.5 percent Bond S has a coupon rate of 15.5 percent. Both bonds have eight years to maturity, make semiannual payments, and have a YTM of 12 percent If interest rates suddenly rise by 3 percent. What is the percentage change in the price of these bonds? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your answer to 2 decimal places (e.g.. 32.16).) If interest rates suddenly fall by 3 percent instead, what is the percentage change in the price of these bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g.. 32.16).)Explanation / Answer
The price of the bond J =pv(rate,nper,pmt,fv) =pv(0.12/2,8*2,55/2,1000)=671.56
The price of bond S =pv(rate,nper,pmt,fv) =pv(0.12/2,8*2,155/2,1000)=1176.85
Req 1: When the YTM rises by 3%, rate will become 15%
The price of the bond J =pv(rate,nper,pmt,fv) =pv(0.15/2,8*2,55/2,1000)=565.78
The price of bond S =pv(rate,nper,pmt,fv) =pv(0.15/2,8*2,155/2,1000)=1022.85
% change in Bond J = (565.78 -671.56)/671.56 = -15.75%(negative)
% change in Bond S = (1022.85-1176.85)/1176.85 =-13.09% (negative)
Req 2: When the YTM falls by 3%, rate will become 9%
The price of the bond J =pv(rate,nper,pmt,fv) =pv(0.09/2,8*2,55/2,1000)=803.40
The price of bond S =pv(rate,nper,pmt,fv) =pv(0.09/2,8*2,155/2,1000)=1365.11
% change in Bond J = (803.40 -671.56)/671.56 = 19.63% (positive)
% change in Bond S = (1365.11-1176.85)/1176.85 = 16.00% (positive)