Question

Both Bond Bill and Bond Ted have 11 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 3 years to maturity, whereas Bond Ted has 20 years to maturity. Both bonds have a par value of 1,000. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? (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.)

Percentage change in price

Bond Bill %

Bond Ted %

If rates were to suddenly fall by 2 percent instead, what would be the percentage change in the price of these bonds? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Percentage change in price

Bond Bill %

Bond Ted %

Answer 1

Solution:
Given:
If Rates were to rise by 2%
	Bond Bill	Bond Ted
Rate	11%	11%
Term i.e Nper	6 Semiannual Payments	40 Semiannual Payments
	(3 Years *2 = 6)	(20 Years *2 = 40)
Current price i.e Par value	$1000	$1000
New Yield Rise by 2% I.e RATE	11%+2% = 13% =13%/2 i.e 6.5% semiannual	11%+2% = 13% =13%/2 i.e 6.5% semiannual
Coupon Amount i.e PMT	$1000*11%/2 = $ 55	$1000*11%/2 = $ 55
Maturity value i.e FV	$1000	$1000
Bond Bill:
Using the PV Function in excel we will calculate the Current price of Bond with the New yield i.e 13%
PV(6.5%,6,$55,$1000,0)
$951.589864430618
% change in price = (New Price - Old price)/Old Price *100
($951.59-$1000)/$1000*100
-0.04841
-4.841
% change in price for Bond Bill = -4.84%
Bond Ted:
Using the PV Function in excel we will calculate the Current price of Bond with the New yield i.e 13%
PV(6.5%,40,$55,$1000,0)
$858.544731326865
% change in price = (New Price - Old price)/Old Price *100
($858.54-$1000)/$1000*100
-14.146
% change in price for Bond Bill = -14.15%
If Rates were to fall by 2%
	Bond Bill	Bond Ted
Rate	11%	11%
Term i.e Nper	6 Semiannual Payments	40 Semiannual Payments
	(3 Years *2 = 6)	(20 Years *2 = 40)
Current price i.e Par value	$1000	$1000
New Yield Rise by 2% I.e RATE	11%-2% = 9% = 9%/2 i.e 4.5% semiannual	11%-2% = 9% = 9%/2 i.e 4.5% semiannual
Coupon Amount i.e PMT	$1000*11%/2 = $ 55	$1000*11%/2 = $ 55
Maturity value i.e FV	$1000	$1000
Bond Bill:
Using the PV Function in excel we will calculate the Current price of Bond with the New yield i.e 9%
PV(4.5%,6,$55,$1000,0)
$1051.57872482707
% change in price = (New Price - Old price)/Old Price *100
($1051.58-$1000)/$1000*100
5.158
% change in price for Bond Bill = 5.16%
Bond Ted:
Using the PV Function in excel we will calculate the Current price of Bond with the New yield i.e 9%
PV(4.5%,40,$55,$1000,0)
$1184.0158442028
% change in price = (New Price - Old price)/Old Price *100
($1184.02-$1000)/$1000*100
18.402
% change in price for Bond Bill = 18.40%