Question

Both Bond Sam and Bond Dave have 8 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 2 years to maturity, whereas Bond Dave has 20 years to maturity. (Do not round your intermediate calculations.) Requirement 1:

(a) If interest rates suddenly rise by 4 percent, what is the percentage change in the price of Bond Sam?

(b) If interest rates suddenly rise by 4 percent, what is the percentage change in the price of Bond Dave?

Requirement 2:

(a) If rates were to suddenly fall by 4 percent instead, what would the percentage change in the price of Bond Sam be then?

(b) If rates were to suddenly fall by 4 percent instead, what would the percentage change in the price of Bond Dave be then?

Answer 1

		Bond Sam:
		Assuming par value	$1,000
		Semi annualcoupon payment	$        40.00	(1000*(0.08/2)
		Semiannual periods to maturity	4	(2*2)
		Terminal payment at maturity	$1,000
	(a)	If interest rate rises by 4%
		New semiannual interest rate	6%	(8+4)/2
		Price of Bond=Present Value of cash flows
		Price of Bond	$930.70	(Using PV function of excel with Rate=6%, Nper=4,Pmt=-40, Fv=-1000)
		Percentage Change in Bond Price	-6.93%	(930.70/1000)-1
	.(c)	If interest rate falls by 4%
		New interest rate	2%	(8-4)/2
		Price of Bond=Present Value of cash flows
		Price of Bond	$1,076.15	(Using PV function of excel with Rate=2%, Nper=4,Pmt=-40, Fv=-1000)
		Percentage Change in Bond Price	7.62%	(1076.15/1000)-1
		Bond Dave:
		Assuming par value	$1,000
		Semi annualcoupon payment	$        40.00	(1000*(0.08/2)
		Semiannual periods to maturity	40	(20*2)
		Terminal payment at maturity	$1,000
	(a)	If interest rate rises by 4%
		New semiannual interest rate	6%	(8+4)/2
		Price of Bond=Present Value of cash flows
		Price of Bond	$699.07	(Using PV function of excel with Rate=6%, Nper=40,Pmt=-40, Fv=-1000)
		Percentage Change in Bond Price	-30.09%	(699.07/1000)-1
	.(c)	If interest rate falls by 4%
		New interest rate	2%	(8-4)/2
		Price of Bond=Present Value of cash flows
		Price of Bond	$1,547.11	(Using PV function of excel with Rate=2%, Nper=40,Pmt=-40, Fv=-1000)
		Percentage Change in Bond Price	54.71%	(1547.11/1000)-1