Both Bond Sam and Bond Dave have 6 percent coupons, make semiannual payments, an

Question

Both Bond Sam and Bond Dave have 6 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has two years to maturity, whereas Bond Dave has 15 years to maturity. If 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, 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.)

Explanation / Answer

Bond Sam 6% Coupons Price (30*((1-(1+0.03)^-4)/0.03))+(1000/(1+0.03)^4) = 1000 Interest rate increase by 2% to 8% (30*((1-(1+0.04)^-4)/0.04))+(1000/(1+0.04)^4) = 963.70 % age change (963.7-1000)/1000*100 -3.63 Bond Dave 6% Coupons (30*((1-(1+0.03)^-30)/0.03))+(1000/(1+0.03)^30)= 1000 Interest rate increase by 2% to 8% (30*((1-(1+0.04)^-30)/0.04))+(1000/(1+0.04)^30) 827.08 % age change (827.08-1000)/1000*100 -17.292 % age change in Price of Bond Sam -3.63% % age change in Price of Bond Dave -17.29% Bond Sam Interest rate fall by 2% to 4% (30*((1-(1+0.02)^-4)/0.02))+(1000/(1+0.02)^4) = 1038.08 % age change (1038.08-1000)/1000*100 3.808 Bond Dave Interest rate fall by 2% to 4% (30*((1-(1+0.02)^-30)/0.02))+(1000/(1+0.02)^30) 1223.96 % age change (1223.96-1000)/1000*100 22.396 % age change in Price of Bond Sam 3.81% % age change in Price of Bond Dave 22.40%

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