Question

Bond J has a coupon rate of 7 percent and Bond K has a coupon rate of 13 percent. Both have 12 years to maturity, both make semiannual payments, and both have a YTM of 10 percent.

a.) If interest rates suddenly rise by 2 percent, what's the percentage price change of these bonds?

b.) If rates suddenly fall by 2 percent instead?

Fill in the table with answers.

a.)	Bond J	???? %
a.)	Bond K	???? %
b.)	Bond J	???? %
b.)	Bond K	???? %

Answer 1

a.	Bond J	-13.46%
	Bond K	-11.95%
Working:
	Price of bond J	=	=-pv(rate,nper,pmt,fv)		Price of bond K	=	=-pv(rate,nper,pmt,fv)
		=	$     793.02			=	$ 1,206.98
	Where,				Where,
	rate	5%			rate	5%
	nper	24			nper	24
	pmt	$             35			pmt	$          65
	fv	$       1,000			fv	$    1,000
	After rise in interest rate by 2%:
	Price of bond J	=	=-pv(rate,nper,pmt,fv)		Price of bond K	=	=-pv(rate,nper,pmt,fv)
		=	$     686.24			=	$ 1,062.75
	Where,				Where,
	rate	6%			rate	6%
	nper	24			nper	24
	pmt	$             35			pmt	$          65
	fv	$       1,000			fv	$    1,000
	Price change of bonds:
	Bond J	=	(P1-P0)/P0	=	-13.46%
	Bond K	=	(P1-P0)/P0	=	-11.95%
	Where,
		P0	P1
	Bond J	$     793.02	$     686.24
	Bond K	$ 1,206.98	$ 1,062.75
b.	Bond J	16.49%
	Bond K	14.43%
Working:
	After fall in interest rate by 2%:
	Price of bond J	=	=-pv(rate,nper,pmt,fv)		Price of bond K	=	=-pv(rate,nper,pmt,fv)
		=	$     923.77			=	$ 1,381.17
	Where,				Where,
	rate	4%			rate	4%
	nper	24			nper	24
	pmt	$             35			pmt	$          65
	fv	$       1,000			fv	$    1,000
	Price change of bonds:
	Bond J	=	(P1-P0)/P0	=	16.49%
	Bond K	=	(P1-P0)/P0	=	14.43%
	Where,
		P0	P1
	Bond J	$     793.02	$     923.77
	Bond K	$ 1,206.98	$ 1,381.17