Question
In: Finance
Bond J is a 5 percent coupon bond. Bond K is a 11 percent coupon bond....
Bond J is a 5 percent coupon bond. Bond K is a 11 percent coupon bond. Both bonds have 10 years to maturity, make semiannual payments, and have a YTM of 7 percent. Requirement 1: (a) If interest rates suddenly rise by 3 percent, what is the percentage price change of Bond J? (b) If interest rates suddenly rise by 3 percent, what is the percentage price change of Bond K? Requirement 2: (a) If interest rates suddenly fall by 3 percent, what is the percentage price change of Bond J? (b) If interest rates suddenly fall by 3 percent, what is the percentage price change of Bond K?
Solutions
Expert Solution
Current Price of both bond is calculated in excel and screen shot provided below:
Price of bond J is $857.88 and Price of bond K is $1,284.25.
a.
If Interest rate fall by 3% then New YTM become 4%. So new price of bond and percentage change in price is calculated in excel and screen shot provided below:
New Price of Bond J is $1,081.76 and Price of bond K is $1,572.30.
Percentage increase in price of bond J is 26.10% and price increase in Bond J is 22.43%.
b.
If Interest rate raise by 3% then New YTM become 10%. So new price of bond and percentage change in price is calculated in excel and screen shot provided below:
New Price of Bond J is $688.44 and Price of bond K is $1,062.32.
Percentage increase in price of bond J is -19.75% and price increase in Bond J is -17.28%.
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