Both Bond Bill and Bond Ted have 9.4 percent coupons, make semiannual payments, and are priced at...

Question:

Both Bond Bill and Bond Ted have 9.4 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 5 years to maturity, whereas Bond Ted has 22 years to maturity. Both bonds have a par value of 1,000.

a) If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds?

b) If rates were to suddenly fall by 2 percent instead, what would be the percentage change in the price of these bonds?

Bond Valuation and Interest Rates:

When interest rates in the broader economy change, the price of bonds changes inversely. Bonds with longer time to maturity will typically see higher fluctuations in price as a result of more compounding periods.

Answer and Explanation:

a) If interest rates rose by 2%, bond Bill would have a price of $925.34 and bond Ted would have a price of $839.87

Bond values are calculated using...

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Bond Valuation: Formula, Steps & Examples

from Finance 301: Corporate Finance

Chapter 7 / Lesson 6
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