Business, 22.04.2020 22:37 willveloz4

Both Bond A and Bond B have 9.6 percent coupons and are priced at par value. Bond A has 8 years to maturity, while Bond B has 20 years to maturity. a. If interest rates suddenly rise by 2.2 percent, what is the percentage change in price of Bond A and Bond B? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

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Answer from: dfrtgyuhijfghj4794

Change in Bond A price is -11.01%

Change in Bond B price is -16.64%

Explanation:

The starting to solving this question would be to calculate the initial prices of both bonds at 9.6% and their prices when interest rose by 2.2%

When bonds are issued at par of $1000 both yield to maturity and coupon rate are the same.invariably the bonds were issued at $1000 each

However,when yield to maturity increases by 2.2%,the new yield to maturity is 9.6%+2.2%=11.8%,the new prices can determined as follows:

The bond price can be computed by using the pv formula in excel,which is given below:

=-pv(rate,nper,pmt,fv)

Bond A

rate is now 11.8%

nper is the number of times the bond pays coupon interest over the life of the bond,which is 8

pmt is the annual coupon payable by the bond,which is $1000*9.6%=$96

fv is the face value of $1000 at which the bond would be retired.

=-pv(11.8%,8,96,1000)=$ 889.94

Change in Bond A price=($889.94-$1000)/$1000=-11.01%

Bond B

rate is now 11.8%

nper is the number of times the bond pays coupon interest over the life of the bond,which is 20

pmt is the annual coupon payable by the bond,which is $1000*9.6%=$96

fv is the face value of $1000 at which the bond would be retired.

=-pv(11.8%,20,96,1000)=$833.59

Change in Bond B price=($833.59-$1000)/$1000=-16.64%

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Both Bond A and Bond B have 9.6 percent coupons and are priced at par value. Bond A has 8 years to m...

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