Laurel, Inc., and Hardy Corp. both have 10 percent coupon bonds outstanding, with semiannual interest payments, and both are currently priced at the par value of $1,000. The Laurel, Inc., bond has six years to maturity, whereas the Hardy Corp. bond has 19 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of each bond?

Question

Jamiya

Business

4 April, 08:43

Laurel, Inc., and Hardy Corp. both have 10 percent coupon bonds outstanding, with semiannual interest payments, and both are currently priced at the par value of $1,000. The Laurel, Inc., bond has six years to maturity, whereas the Hardy Corp. bond has 19 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of each bond?

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Answers (1)

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Eduardo Livingston · Answer 1

Laurel = - 8.38%

Hardy = - 14.85%

Explanation:

Present Price of Bond:

Laurel, Inc. = $1000

Hardy Corp. = $1000

After Percentage Price would be

Laurel, Inc = Present Value (i=6%, n=12, PMT=50, FV=1000) = $916.16

Hardy Corp = Present Value (i=6%, n=30, PMT=50, FV=1000) = $851.54

Percentage change in price

Laurel, Inc = (916.16-1000) / 1000 = - 8.38%

Hardy Corp = (851.54-1000) / 1000 = - 14.85%