The Garraty Company has two bond issues outstanding. Both pay $105 interest plus
ID: 2805691 • Letter: T
Question
The Garraty Company has two bond issues outstanding. Both pay $105 interest plus $1,000 at maturity. Bond L has a maturity of 5 years, and Bond S has a maturity of 1 year.
a) What will the value of each bond be if the going interest rate is 9%?
b) Which bond will have the greater percentage change in price if interest rates increase by 1 percentage point?
Question 78 options:
a) L = $1013.76; S = $1000.00
b) Bond L
a) L = $1013.76; S = $1058.34
b) Bond S
a) L = $1058.34; S = $1013.76
b) Bond L
a) L = $1058.34; S = $1013.76
b) Bond S
a) L = $1000.00; S = $1058.34
b) Bond L
a) L = $1013.76; S = $1000.00
b) Bond L
a) L = $1013.76; S = $1058.34
b) Bond S
a) L = $1058.34; S = $1013.76
b) Bond L
a) L = $1058.34; S = $1013.76
b) Bond S
a) L = $1000.00; S = $1058.34
b) Bond L
Explanation / Answer
Answer is Option D.
Answer a.
Bond L:
Annual Interest Paid = $105
Maturity Value = $1,000
Time to Maturity = 5 years
Annual Interest Rate = 9%
Current Price = $105 * PVIFA(9%, 5) + $1,000 * PVIF(9%, 5)
Current Price = $105 * (1 - (1 / 1.09)^5) / 0.09 + $1,000 / 1.09^5
Current Price = $1,058.34
Bond S:
Annual Interest Paid = $105
Maturity Value = $1,000
Time to Maturity = 1 years
Annual Interest Rate = 9%
Current Price = $105 * PVIFA(9%, 1) + $1,000 * PVIF(9%, 1)
Current Price = $105 / 1.09 + $1,000 / 1.09
Current Price = $1,013.76
Answer b.
Bond L:
If YTM increases by 1%:
Annual Interest Paid = $105
Maturity Value = $1,000
Time to Maturity = 5 years
Annual Interest Rate = 10%
Current Price = $105 * PVIFA(10%, 5) + $1,000 * PVIF(10%, 5)
Current Price = $105 * (1 - (1 / 1.10)^5) / 0.10 + $1,000 / 1.10^5
Current Price = $1,018.95
Change in Price = ($1,018.95 - $1,058.34) / $1,058.34
Change in Price = -3.72%
Bond S:
If YTM increases by 1%:
Annual Interest Paid = $105
Maturity Value = $1,000
Time to Maturity = 1 years
Annual Interest Rate = 10%
Current Price = $105 * PVIFA(10%, 1) + $1,000 * PVIF(10%, 1)
Current Price = $105 / 1.10 + $1,000 / 1.10
Current Price = $1,004.55
Change in Price = ($1,004.55 - $1,013.76) / $1,013.76
Change in Price = -0.91%
So, price of Bond S change with greater percentage
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.