Bond J is a 7.8 percent coupon bond. Bond K is a 11.8 percent coupon bond. Both
ID: 451258 • Letter: B
Question
Bond J is a 7.8 percent coupon bond. Bond K is a 11.8 percent coupon bond. Both bonds have 12 years to maturity and have a YTM of 8.7 percent
. a. If interest rates suddenly rise by 2.4 percent, what is the percentage price change of these bonds? (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
The answer is not the following ....
If interest rates suddenly fall by 2.4 percent, what is the percentage price change of these bonds? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
The answer is not the following ...
Bond J 15.81 Bond K 14.70Explanation / Answer
Formula of compound interest is
A = P(1 + r/n)nt
Where:
r = R/100
For Bond J
If face value of bond J is $100
Then P =$100
r = 7.8%
n = 1 year
t = 12 years
After putting values in above formula We will get
A= $ 246.28 which is price of Bond J.
If interest rate is increased by 2.4 % means final interest rate would be 7.98%
If face value of bond J is $100
Then P =$100
r = 7.98%
n = 1 year
t = 12 years
After putting values in above formula We will get
A= $ 251.26 which is price of Bond J.
So percentage increase in Accrued Amount is (251.26-246.28)/246.28 = 2.02
If interest rate is decreased by 2.4 % means final interest rate would be 7.61%
If face value of bond J is $100
Then P =$100
r = 7.61%
n = 1 year
t = 12 years
After putting values in above formula We will get
A= $ 241.12 which is price of Bond J.
So percentage increase in Accrued Amount is (241.12-246.28)/246.28 =
(- 2.095)
For Bond K
A = P(1 + r/n)nt
Where:
r = R/100
If face value of bond J is $100
Then P =$100
r = 11.8%
n = 1 year
t = 12 years
After putting values in above formula we will get
A= $ 381.33 which is price of Bond K.
If interest rate is raised by 2.4 % means final interest rate would be 12.083%
If face value of bond J is $100
Then P =$100
r = 12.083%
n = 1 year
t = 12 years
After putting values in above formula We will get
A= $ 393.08 which is price of Bond K.
So percentage increase in Accrued Amount is (393.08-381.33)/381.33 = 3.081
If interest rate is decreased by 2.4 % means final interest rate would be 11.51%
If face value of bond J is $100
Then P =$100
r = 11.51%
n = 1 year
t = 12 years
After putting values in above formula We will get
A= $ 369.63 which is price of Bond K.
So percentage increase in Accrued Amount is (369.63-381.33)/381.33 =
(- 3.068)