Question

Unchargeu. Widt " three years? In eight years? In 12 years? In 13 years? What's going on here? Illustrate your answers by graphing bond prices versus time to maturity. 19. Interest Rate Risk (LO2] Both Bond Sam and Bond Dave have 6.5 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 3 years to maturity, whereas Bond Dave has 20 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam? Of Bond Dave? If rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of Bond Sam be then? Of Bond Dave? Illustrate your answers by graphing bond prices versus YTM. What does this problem tell you about the interest rate risk of longer-term bonds?

Hi,

Would you show me how to solve #19 problem with ONLY using a financial calculator?
Thank you very much for your time!

Answer 1

As bonds are priced at par, the ytm must be equal to coupon raate=6.5%

I will show for Bond Sam for 2% increase and 2% decrease

2% increase:
N=2*3=6
PMT=-6.5%*100/2=-3.25
I/Y=(6.5%+2%)/2=4.25%
FV=-100
CPT PV=94.800

% change=94.80/100-1=-5.200%

2% decrease:
N=2*3=6
PMT=-6.5%*100/2=-3.25
I/Y=(6.5%-2%)/2=2.25%
FV=-100
CPT PV=105.554

% change=105.554/100-1=5.554%