Question

Both Bond Sam and Bond Dave have 10 percent annual coupons but make semiannual payments. The bonds' yield to maturity is equal to the coupon rate, so the bonds and are priced at par value. Bond Sam has five years to maturity, whereas Bond Dave has 16 years to maturity.

To see how changes in interest rates affect bond prices, assume that interest rates suddenly rise by 2 percent. What is the percentage change in the price of Bond Sam and Bond Dave? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Percentage change in the price of Bond Sam	%
Percentage change in the price of Bond Dave	%

If rates were to suddenly fall by 2 percent instead of rising, what would be the percentage change in the price of Bond Sam and Bond Dave? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Percentage change in price of Bond Sam	%
Percentage change in price of Bond Dave	%

Answer 1

Here in this question it is given that both bond are par value bond as YTM is equal to coupon rate so

Kd = CR = 10% that means our discount factor is 10%

now let us assume that the Par value of both bonds is 1000

.the value of the both bonds if interest rate rises by 2%

Answer (B)
Bond Sam
Year	Interest @ 12%	PVF @ 10%	PV
1	120	0.909	109.0909
2	120	0.826	99.17355
3	120	0.751	90.15778
4	120	0.683	81.96161
5	120	0.621	74.51056
5	1000	0.564	564.4739
	Value of bond	=	1019.368
Percentage change in price of bond Sam
19.368/1000	=	1.94%
Bond Dave
Year	Interest @ 12%	PVF @ 10%	PV
1	120	0.909	109.0909
2	120	0.826	99.17355
3	120	0.751	90.15778
4	120	0.683	81.96161
5	120	0.621	74.51056
6	120	0.564	67.73687
7	120	0.513	61.57897
8	120	0.467	55.98089
9	120	0.424	50.89171
10	120	0.386	46.26519
11	120	0.350	42.05927
12	120	0.319	38.2357
13	120	0.290	34.75973
14	120	0.263	31.59975
15	120	0.239	28.72705
16	120	0.218	26.1155
16	1000	0.198	197.8447
	Value of bond	=	1136.69
Percentage change in price of bond Dave
136.69/1000	=	13.67%

Answer(C) IF interest rate decline by 2 %

Bond Sam
Year	Interest @ 8%	PVF @ 10%	PV
1	80	0.909	72.72727
2	80	0.826	66.1157
3	80	0.751	60.10518
4	80	0.683	54.64108
5	80	0.621	49.67371
5	1000	0.564	564.4739
	Value of bond	=	867.7369
Percentage change in price of bond Sam
132.226/1000	=	13.23%
Bond Dave
Year	Interest @ 8%	PVF @ 10%	PV
1	80	0.909	72.72727
2	80	0.826	66.1157
3	80	0.751	60.10518
4	80	0.683	54.64108
5	80	0.621	49.67371
6	80	0.564	45.15791
7	80	0.513	41.05265
8	80	0.467	37.32059
9	80	0.424	33.92781
10	80	0.386	30.84346
11	80	0.350	28.03951
12	80	0.319	25.49047
13	80	0.290	23.17315
14	80	0.263	21.0665
15	80	0.239	19.15136
16	80	0.218	17.41033
16	1000	0.198	197.8447
	Value of bond	=	823.7414
Percentage change in price of bond Dave
176.26/1000	=	17.63%