Both Bond Sam and Bond Dave have 7 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has three years to maturity, whereas Bond Dave has 16 years to maturity. a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam and Bond Dave? (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.) b. 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.)

Solution:

Each bonds have a 7 percent coupon limit. Since sales are also equivalent to 7 percent with par with YTM. The age of Bond Sam is three years and the maturity of Bond Dave is sixteen. At a sudden increase of 2%, interest rates. Decide the shift in both bond price by percentage.

Bond Sam:

Bond Value = pv (rate, nper, pmt, fv)

Rate = (7%+2%) * 1/2 = 4.5%

nper = 3*2 = 6

fv = 1000

pmt = 7%*1000*1/2 = $35

Bond Value = - pv (4.5%,6,35,1000)

Bond Value = $936.65

Percentage change in the price of Bond Sam = (936.65-1000) / 1000 Percentage change in the price of Bond Sam = - 6.33%

Bond Dave:

Bond Value = pv (rate, nper, pmt, fv)

Rate = (7%+2%) * 1/2 = 4.5%

nper = 16*2 = 32

fv = 1000

pmt = 7%*1000*1/2 = 35

Bond Value = pv (4.5%,32,35,1000)

Bond Value = $854.66

Percentage change in the price of Bond Dave = (854.66-1000) / 1000 Percentage change hi the price of Bond Dave = - 14.53%