You own a 15-year bond and a 20-year bond, both of which are non-callable bond and...
You own a 15-year bond and a 20-year bond, both of which are non-callable bond and pay a coupon of 5%. What is true about the change in value of your bonds if interest rate rises from 7% to 11%?
The value of the 20-yr bond will decrease by $17 more than the 15-yr bond
The value of the 20-yr bond will decrease by $11 more than the 15-yr bond
The value of the 20-yr bond will decrease by $38 more than the 15-yr bond
The value of the 20-yr bond will increase by $24 more than the 15-yr bond
The value of the 20-yr bond will increase by $11 more than the 15-yr bond
Homework Answers
The first statement is correct.
| 7% | 11% | Change | |
| 15 year | $818 | $569 | $249 |
| 20 year | $788 | $522 | $266 |
| Difference | $17 |
We need to calculate bond price using PV function on a calculator for both bonds and both interest rates to calculate the difference.
For 15 year bond, N = 15, PMT = 50, FV = 1000, I/Y = 7% => Compute PV = $818 and so on for others.
As can be seen from the table, the value of 20 year bond decrease by $17 more than that of 15 year bond.
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