Bond A and Bond B both have 16 years to maturity and a face value of $1,000. Bond A has a 2.50% coupon while Bond B has a 5.5% coupon. Assume the current market rate is 2.50%. What is the percentage price change for both bonds if the current market interest rate suddenly rises from 2.50% to 5.00%?

Bond's A price will decrease by 27.09%

Bond's B price will decrease by 24.25%

Explanation:

Bond's A current price: should be 1,000, since he market price = coupon rate

Bond's B current price: using an excel spreadsheet we can calculate the net resent value: = NPV (2.5%,55 ... fifteen times, 1055) = $1,391.65

If the market rate increases to 5%

Bond's A current price: using an excel spreadsheet we can calculate the net resent value: = NPV (5%,25 ... fifteen times, 1025) = $729.06

Bond's B current price: using an excel spreadsheet we can calculate the net resent value: = NPV (5%,55 ... fifteen times, 1055) = $1,054.19

Bond's A price will decrease by: [ ($729.06 - $1,000) / $1,000] x 100 = - 27.09%

Bond's B price will decrease by: [ ($1,054.19 - $1,391.65) / $1,391.65] x 100 = - 24.25%