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barxatty [35]
3 years ago
14

The Faulk Corp. has a bond with a coupon rate of 4 percent outstanding. The Gonas Company has a bond with a coupon rate of 10 pe

rcent outstanding. Both bonds have 12 years to maturity, make semiannual payments, and have a YTM of 7 percent. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds?
Business
1 answer:
motikmotik3 years ago
6 0

Answer:

Decrease in price of the bond by 16.01%

Explanation:

Find the price of the bond with the two different YTMs and compare the two prices;

<u>a.) at 7% YTM and semi-annual coupons</u>

N = 12*2 = 24

I/Y = 7%/2 = 3.5%

FV = 1,000 (use 1000 as FV if not given)

PMT = (4%/2)*1000 = 20

PV = $759.12

b.) <u>at 7% YTM and semi-annual coupons</u>

N  = 24

I/Y = (7%+2%)/2 = 4.5%

FV = 1,000 (use 1000 as FV if not given)

PMT = (4%/2)*1000 = 20

PV = $637.61

Percentage change in price = [($637.61 - $759.12)/$759.12] *100

Percentage change in price = -16.01%

There is a decrease in price of the bond by 16.01%

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