Question

Laurel, Inc., and Hardy Corp. both have 7 percent coupon bonds outstanding, with semiannual interest payments, and both are currently priced at the par value of $1,000. The Laurel, Inc., bond has five years to maturity, whereas the Hardy Corp. bond has 20 years to maturity.

If interest rates suddenly rise by 2 percent, what is the percentage change in the price of each bond? (Do not round intermediate calculations. A negative answer should be indicated by a minus sign. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Percentage change in price of Laurel, Inc., bond	%
Percentage change in price of Hardy Corp. bond	%

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

Percentage change in price of Laurel, Inc., bond	%
Percentage change in price of Hardy Corp. bond	%

Answer 1

Price of the bond can be calculated using financial calculator or excel

by using calculator value of the bond will be calculated as follows:

current price of both bonds = $1000

present interest rates = 7%

new interest rates = 9%

semi annual rate = 9 / 2 = 4.5%

coupon = 1000*3.5% = 35

laurel bond:

type [N = 10 , I/Y = 4.5% , PMT = 35 , FV = 1000] and then press CPT(compute) and PV(Present value)

bond price = 920.87

N = time to maturity

I/Y = interest rate

PMT = coupon semi annually

FV = redemption value

% change = (920.87 - 1000) / 1000 = -8.59% (negative value)

Hardy Corp:

[ N = 40 ; I/Y = 4.5% , PMT = 35 , FV = 1000]

Price = $815.98

% change = (815.98 - 1000) / 1000

= -18.40% (negative value)

if interest rates fall by 2%:

new interest rates = 5%

semi annual rate = 5 / 2 = 2.5%

laurel bond:

[N = 10 , I/Y = 2.5% , PMT = 35 , FV = 1000]

price = $1087.52

% change = (1087.52 - 1000) / 1000

= 8.05%

Hardy corp:

[N = 40 , I/Y = 2.5% , PMT = 35 , FV = 1000]

Price = 1251.03

% change = (1251.03 - 1000) / 1000

= 25.10%