Both Bond Sam and Bond Dave have 10 percent annual coupons but make semiannual p
ID: 2619991 • Letter: B
Question
Both Bond Sam and Bond Dave have 10 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 five years to maturity, whereas Bond Dave has 16 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.)
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.)
Both Bond Sam and Bond Dave have 10 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 five years to maturity, whereas Bond Dave has 16 years to maturity.
Explanation / Answer
Here in this question it is given that both bond are par value bond as YTM is equal to coupon rate so
Kd = CR = 10% that means our discount factor is 10%
now let us assume that the Par value of both bonds is 1000
.the value of the both bonds if interest rate rises by 2%
Answer(C) IF interest rate decline by 2 %
Answer (B) Bond Sam Year Interest @ 12% PVF @ 10% PV 1 120 0.909 109.0909 2 120 0.826 99.17355 3 120 0.751 90.15778 4 120 0.683 81.96161 5 120 0.621 74.51056 5 1000 0.564 564.4739 Value of bond = 1019.368 Percentage change in price of bond Sam 19.368/1000 = 1.94% Bond Dave Year Interest @ 12% PVF @ 10% PV 1 120 0.909 109.0909 2 120 0.826 99.17355 3 120 0.751 90.15778 4 120 0.683 81.96161 5 120 0.621 74.51056 6 120 0.564 67.73687 7 120 0.513 61.57897 8 120 0.467 55.98089 9 120 0.424 50.89171 10 120 0.386 46.26519 11 120 0.350 42.05927 12 120 0.319 38.2357 13 120 0.290 34.75973 14 120 0.263 31.59975 15 120 0.239 28.72705 16 120 0.218 26.1155 16 1000 0.198 197.8447 Value of bond = 1136.69 Percentage change in price of bond Dave 136.69/1000 = 13.67%Related Questions
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