Please Help 738 Works Daveu estogut successful CAxyDChapter

738 Works Daveu estogut successful . CAxyDChapter 7-Bonds CAS figure _TAjpg(555x6/ × x ? | ezto.mheducation.com/hm.tpx Both Bond Sam and Bond Dave have 6 percent annual coupons, but make semiannual payments. The bonds\' yield to maturity is equal to the coupon rate, so the bonds and are priced at par value. Bond Sam has three years to maturity, whereas Bond Dave has 20 years to maturity To see how changes in interest rates affect bond prices, assume that 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 540 1% If rates were to suddenly fall by 2 percent instead of rising. 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. ?.9-3216) Percentage change in price of Bond Sanm Percentage change in price of Bond Dave Note. The purpose of this problem is so you can see how coupon/maturity impact the bond\'s price sensitivity to interest rates. For the exam you should understand how the coupon rate and time to maturity impact a bond\'s price sensitivity to interest rates. References eBook & Resources Worksheet Learning co and yields and w they nuctuate

Solution

A. As the bonds are priced at par value, it means that the current yield = 6%

Now, let\'s assume that the yield becomes 8%

New Bond Price of Sam = PV(8%/2, 3*2, 50, 1000, 0) = $1052.42

New Bond Price of Dave = PV(8%/2, 20*2, 50, 1000, 0) = $1197.93

% Change in Bond Sam = 1052.42/1000 - 1 = 5.242%

% Change in Bond Dave =$1197.93/1000 - 1 = 19.79%

B.

Now, let\'s assume that the yield becomes 4%

New Bond Price of Sam = PV(4%/2, 3*2, 50, 1000, 0) = $1168.04

New Bond Price of Dave = PV(4%/2, 20*2, 50, 1000, 0) = $1820.66

% Change in Bond Sam = 1168.04/1000 - 1 = 16.804%

% Change in Bond Dave = 1820.66/1000 - 1 = 82.07 %