Ask Question
BusinessBusiness
20 October, 02:00

Both Bond Sam and Bond Dave have 7 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has six years to maturity, whereas Bond Dave has 19 years to maturity. a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam and Bond Dave?

+3
Answers (1)
  1. 20 October, 02:55
    0
    assume Par Value = 1000

    Price = 1000

    Coupon = 7%

    Coupon = Coupon rate * Par Value/2 = 7% * 1000/2 = 35

    For Sam Maturity = 6 years

    Price = summation Coupont / (1+YTM/2) 2t + Par Value / (1+YTM/2) 2t

    1000 = 35 / (1+YTM/2) 2t + 1000 / (1+YTM/2) 2t

    YTM = 7%

    For Dave Maturity = 19 years

    Price = Coupont / (1+YTM/2) 2t + Par Value / (1+YTM/2) 2t

    1000 = 35 / (1+YTM/2) 2t + 1000 / (1+YTM/2) 2t

    YTM = 7%

    If YTM increases by 2% so new YTM = 9%

    For Sam Maturity = 6 years

    Price = Coupont / (1+YTM/2) 2t + Par Value / (1+YTM/2) 2t

    Price = 35 / (1 + (9%/2) 2t + 1000 / (1+9%/2) 2t

    Price = 908.81

    Percentage change in price of Sam bond = 908.81 - 1000/1000 = - 9.12%

    For Dave Maturity = 19 years

    Price = Coupont / (1+YTM/2) 2t + Par Value / (1+YTM/2) 2t

    Price = 35 / (1+9%/2) 2t + 1000 / (1+9%/2) 2t

    Price = 819.50

    Percentage change in price of Dave bond = (819.50-1000) / 1000 = - 18.05%

    If YTM decreases by 2% so new YTM = 5%

    For Sam Maturity = 6 years

    Price = Coupont / (1+YTM/2) 2t + Par Value / (1+YTM/2) 2t

    Price = 35 / (1 + (5%/2) 2t + 1000 / (1+5%/2) 2t

    Price = 1102.58

    Percentage change in price of Sam bond = (1102.58 - 1000) / 1000 = 10.26%

    For Dave Maturity = 19 years

    Price = Coupont / (1+YTM/2) 2t + Par Value / (1+YTM/2) 2t

    Price = 35 / (1+5%/2) 2t + 1000 / (1+5%/2) 2t

    Price = 1243.49

    Percentage change in price of Dave bond = (1243.49-1000) / 1000 = 24.35%
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “Both Bond Sam and Bond Dave have 7 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has six years to ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers
You Might be Interested in
Pinto Corp. sells $300,000 of bonds to private investors. The bonds have a 4% coupon rate and interest is paid semiannually. The bonds were sold to yield 5%. What periodic interest payment does Pinto make to its investors? A. $6,000 B. $5,000 C.
Answers (1)
Adventures Company provides event management services. The company has three employees, each assigned to specific customers. The company considers each employee's territory as a business segment.
Answers (1)
Ruth Company produces 1,000 units of a necessary component with the following costs: Direct Materials $34,000 Direct Labor 15,000 Variable Overhead 9,000 Fixed Overhead 10,000 Ruth Company could avoid $6,000 in fixed overhead costs if it acquires
Answers (1)
Suppose that in southlandia, frictional unemployment is 2%, structural unemployment is 3%, and cyclical unemployment is 4%. what is the natural rate of unemployment in southlandia?
Answers (1)
Hughes Company manufactures harmonicas which it sells for $31 each. Variable costs for each unit are $18 and total fixed costs are $3,925. How many units must be sold to earn income of $5,500?
Answers (1)
New Questions in Business
Fleet Foot Shoes has been successful at differentiating itself from competitors by claiming a premium price for its athletic footwear based on superior design and high-quality materials.
Answers (1)
Which of the following statements is most likely true of market follower strategies? market followers have the resources to expand the market by developing new users, new uses, and more usage of its products.
Answers (1)
The return on a Futures contract A) is Highly related to the low margin requirement B) is always equal to or greater than zero C) Tends to be fairly stable from one trading day to the next D) is solely related to the current price of the underlying
Answers (1)
On October 15, 2018, a 5% stock dividend was declared and distributed. The fair value of the common stock on this date was $31.8 per share. Fractional share rights represented 100,000 shares. Cash was paid in lieu of issuing fractional share rights.
Answers (1)
Which sources of information would be the most inclusive for an entrepreneur determining information to complete financial statements?
Answers (1)
Home » Business » Both Bond Sam and Bond Dave have 7 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has six years to maturity, whereas Bond Dave has 19 years to maturity. a.
Sign Up Forgot Password?