msstateedu x Chapter 7-Bonds x Devaun ? | ezto.mheducation.com/hm.tpx Both Bond
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msstateedu x Chapter 7-Bonds x Devaun ? | ezto.mheducation.com/hm.tpx Both Bond Sam and Bond Dave have 6 percent annual coupons, but make semiannual payments. The bonds' yield to maturity is equal to the coupon rate, so the bonds and are priced at par value. Bond Sam has three years to maturity, whereas Bond Dave has 20 years to maturity To see how changes in interest rates affect bond prices, assume that interest rates suddenly rise by 2 percent. What is the percentage change in the price of Bond Sam and Bond Dave? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g, 32.16.) Percentage change in price of Bond Sam Percentage change in price of Bond Dave If rates were to suddenly fall by 2 percent instead of rising, what would be the percentage change in the price of Bond Sam and Bond Dave? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Percentage change in price of Bond Sam Percentage change in price of Bond Dave Note The purpose of this problem is so you can see how coupon/maturity impact the bond's price sensitivity to interest rates. For the exam you should understand how the coupon rate and time to maturity impact a bond's price sensitivity to interest rates Reférences eBook & Resources ay 18 Worksheet 07-02 Bond valuesExplanation / Answer
Answer 1. Let the Par Value of Both Bond = $1,000 Bond Sam Table Value Based on n= 6 (3 Years X 2) i= 4.00% (8% / 2) Cash Flow Amount Present Value Interest - $1,000 X 6% X 6/12 30 157.26 ($30 X 5.2421) Principal 1,000 790.30 ($1,000 X 0.7903) Market Price of Bond Sam 947.56 Percentage Change in Price of Bond Sam = ($947.56 - $1,000) / $1,000 Percentage Change in Price of Bond Sam = -5.24% (Approx.) Bond Dave Table Value Based on n= 40 (20 Years X 2) i= 4.00% (8% / 2) Cash Flow Amount Present Value Interest - $1,000 X 6% X 6/12 30 593.78 ($30 X 19.7928) Principal 1,000 208.30 ($1,000 X 0.2083) Market Price of Bond Dave 802.08 Percentage Change in Price of Bond Dave = ($802.08 - $1,000) / $1,000 Percentage Change in Price of Bond Dave = -19.79% (Approx.) Answer 2. Let the Par Value of Both Bond = $1,000 Bond Sam Table Value Based on n= 6 (3 Years X 2) i= 2.00% (4% / 2) Cash Flow Amount Present Value Interest - $1,000 X 6% X 6/12 30 219.77 ($30 X 7.3255) Principal 1,000 888.00 ($1,000 X 0.8880) Market Price of Bond Sam 1,107.77 Percentage Change in Price of Bond Sam = ($1,107.77 - $1,000) / $1,000 Percentage Change in Price of Bond Sam = 10.78% (Approx.) Bond Dave Table Value Based on n= 40 (20 Years X 2) i= 2.00% (4% / 2) Cash Flow Amount Present Value Interest - $1,000 X 6% X 6/12 30 820.67 ($30 X 27.3555) Principal 1,000 452.90 ($1,000 X 0.4529) Market Price of Bond Dave 1,273.57 Percentage Change in Price of Bond Dave = ($1273.57 - $1,000) / $1,000 Percentage Change in Price of Bond Dave = 27.36% (Approx.)
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