Question

1.

The Faulk Corp. has a 5 percent coupon bond outstanding. The Gonas Company has a 11 percent bond outstanding. Both bonds have 19 years to maturity, make semiannual payments, and have a YTM of 8 percent.

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 of Faulk	%
Percentage change in price of Gonas	%

2.

What if interest rates suddenly fall by 2 percent instead? (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 of Faulk	%
Percentage change in price of Gonas	%

Answer 1

Faulk corp. Bond rise by 2% interest rate 10% 38 fall by 2% interest rate 6% interest rate 8% 38 NPER = Number of coupon payments (19*2) (19*2) (19*2) rate = rate per period = YTM/2 0.04 (8%/2) 0.05 (10%/2) 0.03 (6%/2) PMT = coupon paid per period 25 (1000*5%/2) (1000*5%/2) 25 (1000*5%/2) FV = Face value 1000 1000 1000 PV = PRICE = $709.48 $887.54 Gonas co. Bond $578.30 Price =-PV(RATE,NPER,PMT,FV) rise by 2% interest rate 10% (19*2) (19*2) fall by 2% interest rate 6% interest rate 8% 38 NPER = Number of coupon payments 38 38 (19*2) rate = rate per period = YTM/2 0.04 (8%/2) 0.05 (10%/2) 0.03 (6%/2) PMT = coupon paid per period (1000*11%/2) 55 (1000*11%/2) 55 (1000*11%/2) FV = Face value 1000 1000 1000 PV = PRICE = $1,290.52 $1,562.31 $1,084.34 Price =-PV(RATE,NPER,PMT,FV)

-18.49% -15.98% (578.30-709.48)/709.48 (1084.34-1290.52)/1290.52 Requirement 1: If interest rate rises by 2%: percentage change in price of faulk corp. percentage change in price of Gonas co. Requirement 2: If interest rate falls by 2%: percentage change in price of faulk corp. percentage change in price of Gonas co. 25.09% 21.06% (887.54-709.48)/709.48 (1562.31-1290.52)/1290.52