Both Bond Sam and Bond Dave have 8 percent coupons, make semiannual payments, and are priced...

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Accounting

Both Bond Sam and Bond Dave have 8 percent coupons, makesemiannual payments, and are priced at par value. Bond Sam has 2years to maturity, whereas Bond Dave has 16 years to maturity.

If interest rates suddenly rise by 4 percent, what is thepercentage change in the price of Bond Sam?


If interest rates suddenly rise by 4 percent, what is thepercentage change in the price of Bond Dave?


If rates were to suddenly fall by 4 percent instead, what wouldthe percentage change in the price of Bond Sam be then?


If rates were to suddenly fall by 4 percent instead, what wouldthe percentage change in the price of Bond Dave be then?

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Solution 1 If interest rate suddenly rise by 4 a change in price of Bond Sam 693 b change in price of Bond Dave 2817 2 If interest rate suddenly fall by 4 a change in price of Bond Sam 762 b change in price of Bond Dave 4694 Working Notes AS both the bonds priced at par value YTM of both bonds is equal to Coupon Rate that is 8 1st case is of interest rate suddenly rise by 4 means YTM becomes 8412 then price of both bond will fall as YTM of Bond is more than its coupon rate Bond Sam price 93069424 Bond Price Periodic Coupon Payments x Cumulative PVF periodic YTM for t to tn PVF for tn periodic YTM x Face value of Bond Coupon Rate 8 Annual coupon Face value of bond x Coupon Rate 1000 x 8 80 Semi annual coupon Annual coupon 2 80240 YTM 12 pa annual Semi annual YTM 122 6 n noof See Answer

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	If interest rates suddenly rise by 4 percent, what is thepercentage change in the price of Bond Sam?

	If rates were to suddenly fall by 4 percent instead, what wouldthe percentage change in the price of Bond Sam be then?