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. a. If interest rates suddenly rise by 1.2 percent, what is the percentage price change of these bonds? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) %A in Price Bond J Bond K b. If interest rates suddenly fall by 1.2 percent, what is the percentage price change of these bonds? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) %A in Price Bond J Bond K

Answer 1

B E C Bond J $1,000 10 4.6% D Bond K $1,000 10 Par value Years To Maturity Coupon rate Frequency YTM Current Value 8.6% 2 semi-annual 7.20% $1,099 priced at par 7.20% $817 9 a) New YTM New Price % Change 8.400% $746.30 -8.64% 8.400% $1,013.35 -7.76% 11 12 13 b) New YTM New Price % Change 5.800% 5.800% $909.90 $1,210.22 11.39% 10.16% 15 16

D Bond J Bond K 1000 10 0.046 1000 10 0.086 Par value Years To Maturity Coupon rate Frequency YTM Current Value semi-annual 0.072 =-PV(C6/C5,C3*C5,C4*C2/C5,C2) 0.072 =-PV(D6/D5,D3*D5,D4*D2/D5,D2) priced at par 9 a) New YTM New Price 11 % Change =C6+1.2% --PV(09/C$5,C$3*C$5,C$4*C$2/C$5,C$2) =(C10-C$7)/C$7 =D6+1.2% --PV(D9/D$5,D$3*D$5,0$4*D$2/D$5,0$2) =(D10-D$7)/D$7 12 13 b) New YTM New Price % Change 14 =C6-1.4% =-PV(C13/C$5,C$3*C$5,C$4*C$2/C$5,C$2) =(C14-C$7)/C$7 =D6-1.4% E-PV(D13/D$5,D$3*D$5,D$4*D$2/D$5,D$2) =(D14-D$7)/D$7 15