Question

Question 23

You own two bonds. Both bonds pay annual interest, have 6 percent annual coupons, $1,000 face values, and currently have 6 percent yields to maturity. Bond A has 12 years to maturity and Bond B has 4 years to maturity. If the market rate of interest rises unexpectedly to 7 percent, Bond _____ will be the most volatile with a price decrease of _____ percent.  

Group of answer choices

A; 7.94

B; 3.39

B; 4.51

A; 5.73

A; 6.08

Answer 1

initially Both Bond will be valued at PAR as the Coupon and TYM are equal. I.e. 1000

Value of Bond A after YTM Change

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 7%

And n is the no of Compounding periods 12 years

Coupon 6%

=

= 920.57

% Change = 920.57 - 1000 / 1000 = -7.94%

Value of Bond B after YTM Change

Value of Bond =

Where r is the discounting rate of a compounding period i.e. 7%

And n is the no of Compounding periods 4 years

Coupon 6%

=

= 966.13

% Change = 966.13 - 1000 / 1000 = -3.39%

Bond B as higher change in value i,e. 7.94

Option 1 is correct : A, 7.94

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