Question

Problem 10-18 Interest Rate Risk (LO3, CFA4) Bond J has a coupon of 4.6 percent. Bond K has a coupon of 8.6 percent. Both bonds have 10 years to maturity and have a YTM of 7.2 percent.

Answer 1

BOND J: fall by 1.2% 6.00 interest rate 7.2% interest rate 6% (10 2) NPER Number of coupon payments (10*2) 20 20 (7.2%/2) rate rate per period YTM/2 (6%/2) 0.03 0.036 (1000 4.6%/2) (1000*4.6%/2) PMT coupon paid per period 23 23 FV Face value 1000 1000 Pv PRICE $816.90 $895.86 Price =-PV(RATE,NPER,PMT,FV) BOND K fall by 1.2% interest rate 7.2% interest rate 6% (10 2) (10 2) NPER Number of coupon payments 20 20 rate rate per period YTM/2 (7.2%/2) (6%/2) 0.036 0.03 [1000*8.6%/2] [1000*8.6%/2] PMT coupon paid per period 43 43 FV Face value 1000 1000 Pv PRICE $1,098.59 $1,193.41 Price =-PV(RATE,NPER,PMT, FV)

If interest rate falls by 1.2%: percentage change in price of Bond J percentage change in price of Bond K [ (895.86-816.90)/816.90 ] [ (1193.41-1098.59)/1098.59 ] 9.67% 8.63%