Question

Bond J has a coupon rate of 5 percent. Bond K has a coupon rate of 8 percent. Both bonds have 10 years to maturity, make semiannual payments, and have a YTM of 7 percent.

  

	If interest rates suddenly rise by 2 percent, what is the percentage price change of Bond J?
	-13.74% -12.76% -13.76% -11.76%

  

	If interest rates suddenly rise by 2 percent, what is the percentage price change of Bond K?
	-12.71% -12.69% -10.71% 18.95%

  

	If interest rates suddenly fall by 2 percent, what is the percentage price change of Bond J?
	16.55% -13.78% 16.57% -26.02%

  

	If interest rates suddenly fall by 2 percent, what is the percentage price change of Bond K?
	15.08% -5.50% 15.20% -12.73%

Could you please try to solve this by explaining this process. (NOT IN EXCEL ) As I am trying to solve using Financial calculator so would be helpful If I could see the value to input in calculator. Appreciate it

Answer 1

a. % change in price is computed as follows:

current price is computed as follows:

PMT = 25 (5% / 2 x 1,000)

N = 20 (10 x 2)

FV = 1000

I/Y = 3.50 (7 / 2)

Finally press CPT and then Press PV. It will give price equal to 857.875967

Price after interest rate rises will be as follows:

PMT = 25 (5% / 2 x 1,000)

N = 20 (10 x 2)

FV = 1000

I/Y = 4.50 (9 / 2)

Finally press CPT and then Press PV. It will give price equal to 739.841271

So, the change in price will be as follows:

= (739.841271 - 857.875967) / 857.875967

= - 13.76% Approximately

b. % change in price is computed as follows:

current price is computed as follows:

PMT = 40 (8% / 2 x 1,000)

N = 20 (10 x 2)

FV = 1000

I/Y = 3.50 (7 / 2)

Finally press CPT and then Press PV. It will give price equal to 1,071.062017

Price after interest rate rises will be as follows:

PMT = 40 (8% / 2 x 1,000)

N = 20 (10 x 2)

FV = 1000

I/Y = 4.50 (9 / 2)

Finally press CPT and then Press PV. It will give price equal to 934.9603177

So, the change in price will be as follows:

= (934.9603177 - 1,071.062017) / 1,071.062017

= - 12.71% Approximately

c. % change in price is computed as follows:

current price is computed as follows:

PMT = 25 (5% / 2 x 1,000)

N = 20 (10 x 2)

FV = 1000

I/Y = 3.50 (7 / 2)

Finally press CPT and then Press PV. It will give price equal to 857.875967

Price after interest rate falls will be as follows:

PMT = 25 (5% / 2 x 1,000)

N = 20 (10 x 2)

FV = 1000

I/Y = 2.50 (5 / 2)

Finally press CPT and then Press PV. It will give price equal to 1,000

So, the change in price will be as follows:

= (1,000 - 857.875967) / 857.875967

= 16.57% Approximately

d. % change in price is computed as follows:

current price is computed as follows:

PMT = 40 (8% / 2 x 1,000)

N = 20 (10 x 2)

FV = 1000

I/Y = 3.50 (7 / 2)

Finally press CPT and then Press PV. It will give price equal to 1,071.062017

Price after interest rate falls will be as follows:

PMT = 40 (8% / 2 x 1,000)

N = 20 (10 x 2)

FV = 1000

I/Y = 2.50 (5 / 2)

Finally press CPT and then Press PV. It will give price equal to 1,233.837434

So, the change in price will be as follows:

= (1,233.837434 - 1,071.062017) / 1,071.062017

= 15.20% Approximately

Feel free to ask in case of any query relating to this question