Both Bond Sam and Bond Dave have 8 percent coupons make semi

Both Bond Sam and Bond Dave have 8 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has four years to maturity, whereas Bond Dave has 17 years to maturity If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam and Bond Dave? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g. 32.16.) Percentage change in price of Bond Sam Percentage change in price of Bond Dave 5.08 % -48.58 % If rates were to suddenly fall by 2 percent instead, what would be the percentage change in the price of Bond Sam and Bond Dave? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Percentage change in price of Bond Sam Percentage change in price of Bond Dave 5.42 | % 21.13%

Solution

I presume you used the PV function in Excel to calculate price of the bond when interest rate rises or falls.

In excel to calculate PV, we need the following arguments:

Rate= which is YTM or discounting factor, which is 8%, 10%(increase by 2%) and then 6%(decrese by 2%), for semi-annual payments these are 4%(0.04),5%(0.05) and 3%(0.03).

Number of periods till maturity- in the given case since these are semi-annual coupons peiods are 4 years*2=8 months and 17 years*2=34 months.

Payment amount=coupon amount which is $40 and $20 in this case.

Future value is redemption amount which is $1,000 for both bonds.

Payment due=ending or beginning of period, which is an option argument and by default it considers beginning of period that is 0.

Thus, Price=PV(rate, number_of_periods, payment_amount, [future_value], [end_or_beginning])

Note: Since price of bond represents current outflow, it is shown as a negative figure in the spreadsheet computation which I have attached below:

	Sam Bond	Dave Bond
YTM	0.08	0.1	0.06	0.08	0.1	0.06
N	8	8	8	34	34	34
I/Y	0.04	0.05	0.03	0.04	0.05	0.03
PV	-$1,000.00	-$935.37	-$1,070.20	-$631.78	-$514.21	-$788.68
PMT	40	40	40	20	20	20
FV	1000	1000	1000	1000	1000	1000
	price change	-$64.63	$70.20		-$117.56	$156.91
	percentage change	6.46%	-7.02%		18.61%	-24.84%