Laurel, Inc., and Hardy Corp. both have 9 percent coupon bonds outstanding, with

ID: 2631666 • Letter: L

Question

Laurel, Inc., and Hardy Corp. both have 9 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has 2 years to maturity, whereas the Hardy Corp. bond has 14 years to maturity. If interest rates suddenly fall by 3 percent, the percentage change in the price of Bonds Laurel, Inc., and Hardy Corp. is _______percent and ________percent, respectively. (Negative amounts should be indicated by a minus sign. Do not include the percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Laurel, Inc.,

Price after interest rates suddenly fall by 3 percent = pv(rate,nper,pmt,fv)

rate = 6%/2 = 3%

nper = 2*2 = 4

pmt = 1000*9%*1/2 = 45

fv = 1000

Price after interest rates suddenly fall by 3 percent = pv(3%,4,45,1000)

Price after interest rates suddenly fall by 3 percent = 1055.76

Percentage change in the price of Laurel, Inc = (1055.76-1000)/1000

Percentage change in the price of Laurel, Inc = 5.58%

Hardy Corp.

Price after interest rates suddenly fall by 3 percent = pv(rate,nper,pmt,fv)

rate = 6%/2 = 3%

nper = 14*2 = 28

pmt = 1000*9%*1/2 = 45

fv = 1000

Price after interest rates suddenly fall by 3 percent = pv(3%,28,45,1000)

Price after interest rates suddenly fall by 3 percent = 1281.46

Percentage change in the price of Hardy Corp = (1281.46-1000)/1000

Percentage change in the price of Hardy Corp = 28.15%

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Laurel, Inc., and Hardy Corp. both have 9 percent coupon bonds outstanding, with

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Laurel, Inc., and Hardy Corp. both have 9 percent coupon bonds outstanding, with

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