Answer:
Bond J -16.33%
Bond K -14.04%
Explanation:
In order to determine the percentage price change it is incumbent to establish the bonds' prices with YTM of 8% as well as when interest rises by 2% so as to calculate the price change percentage.
The pv formula can be used to establish the prices as follows:
=-pv(rate,nper,pmt,fv)
rate is semiannual yield to maturity of both bonds which 8%/2=4%
nper is the number of coupon interest payable by the bonds which 14 years multiplied by 2 i.e 28
pmt is the semiannual coupon payment by the bonds:
Bond J=$1000*5%/2=$25
Bond K=$1000*11%/2=$55
fv is the face of the bonds which is $1000 in both cases
Price of bond J;
=-pv(4%,28,25,1000)=$ 750.05
Price of Bond K:
=-pv(4%,28,55,1000)=$1,249.95
New price with 2% increase in interest
Yield previously 8%
plus increase 2%'
total 10%
divided by 2=10%/2=5%
Price of bond J;
=-pv(5%,28,25,1000)=$627.55
Price of Bond K:
=-pv(5%,28,55,1000)=$ 1,074.49
Change in price=new price-old price/old price
Bond J=($627.55-$ 750.05)/$ 750.05=-16.33%
Bonk K=($1,074.49-$1,249.95)/$1,249.95 =-14.04%
