Both Bond A and Bond B have 9.6 percent coupons and are priced at par value. Bond A has 8 years to maturity, while Bond B has 20 years to maturity. a. If interest rates suddenly rise by 2.2 percent, what is the percentage change in price of Bond A and Bond B? (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.)

Change in Bond A price is - 11.01%

Change in Bond B price is - 16.64%

Explanation:

The starting to solving this question would be to calculate the initial prices of both bonds at 9.6% and their prices when interest rose by 2.2%

When bonds are issued at par of $1000 both yield to maturity and coupon rate are the same. invariably the bonds were issued at $1000 each

However, when yield to maturity increases by 2.2%, the new yield to maturity is 9.6%+2.2%=11.8%, the new prices can determined as follows:

The bond price can be computed by using the pv formula in excel, which is given below:

=-pv (rate, nper, pmt, fv)

Bond A

rate is now 11.8%

nper is the number of times the bond pays coupon interest over the life of the bond, which is 8

pmt is the annual coupon payable by the bond, which is $1000*9.6%=$96

fv is the face value of $1000 at which the bond would be retired.

=-pv (11.8%,8,96,1000) = $ 889.94

Change in Bond A price = ($889.94-$1000) / $1000=-11.01%

Bond B

rate is now 11.8%

nper is the number of times the bond pays coupon interest over the life of the bond, which is 20

pmt is the annual coupon payable by the bond, which is $1000*9.6%=$96

fv is the face value of $1000 at which the bond would be retired.

=-pv (11.8%,20,96,1000) = $833.59

Change in Bond B price = ($833.59-$1000) / $1000=-16.64%