Question

Both Bond Jill and Bond Ned have 11 percent coupons, make semiannual payments, and are priced at par value. Bond Jill has 3 years annuity, whereas Bond Ned has 20 years to maturity. Both bonds have a par value of 1,000.

If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds?

If interest rates suddenly fall by 2 percent, what is the percentage change in the p;rice of these bonds?

Answer 1

As Bond are being traded at their par value we can say that
Interest rate = Bond coupon rate = 11%
Coupon interest	11%
Bond par value	1000
Coupon interest	110
		P.V.A.F	Coupon interest	PV of Coupon interest	PV of Maturity amount	Bond Price	Initial bond Price	% Change
I) Increased 2%	13%	14.1455	55	$                          778.00	$80.54	$858.54	$                       1,000	-14.15%
II) Decreased 2%	9%	18.4016	55	$                       1,012.09	$171.93	$1,184.02	$                       1,000	18.40%

As we can see there is a inverse relation between interest rates and price of bonds that is because Interest rates are expectation of investors and coupon rates are return of investment so where

Rate of return > Expectations ( We have price of bond above their par value)

Rate of return < Expectations ( We have price of bond below their par value)

Rate of return = Expectations ( We have price of bond equal to their par value)

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