Laurel, Inc., and Hardy Corp. both have 9 percent coupon bonds outstanding, with
ID: 2796708 • 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 six years to maturity, whereas the Hardy Corp. bond has 17 years to maturity.
If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? (A negative answer 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 Laurel
%
Percentage change in price of Hardy
%
If interest rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of these bonds be then? (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 Laurel
%
Percentage change in price of Hardy
%
Explanation / Answer
It is to be noted that both the bonds are priced at par means YTM=coupen rate = 9%
Situation1) interest rate increases by 2%
Price of bond = interest*PVIFA(R,n years) + redemption value*PVIF(r, nth year)
For Laurel, INC
Price of bond = 1000*4.5%*PVIFA(5.5%,12) + 1000*PVIF(5.5%,12)
=45*8.6185 + 1000*0.526
=387.833+526
=913.83
Percentage change = 913.83-1000/1000 = -8.62%
For Hardy
Price of bond = 1000*4.5%*PVIFA(5.5%,34) + 1000*PVIF(5.5%,34)
=45*15.237 + 1000*0.16196
=685.666+161.96
=847.6265
Percentage change = 847.6265-1000/1000 = -15.24%
If interest rate fell by 2%
For laurel
Price of bond = 1000*4.5%*PVIFA(3.5%,12) + 1000*PVIF(3.5%,12)
=45*9.6633 + 1000*0.6618
=434.85+661.8
=1096.65
Percentage change = (1096.65-1000/1000) = 9.67%
For Hardy
Price of bond = 1000*4.5%*PVIFA(3.5%,34) + 1000*PVIF(3.5%,34)
=45*19.7 + 1000*0.3105
=886.5308 + 310.5
=1197.031
Percentage change = 1197.031-1000/1000 = 19.70%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.