Answer:
New price of bond A = $986.76, this means that the price decreased by $13.24 or 1.32%.
New price of bond B = $952.99, this means that the price decreased by $47.01 or 4.7%.
Explanation:
Since the current market interest is 6%, then both coupons A and B are sold at face value. If the market interest increases to 6.5%, then
New price of bond A:
PV of face value = $1,000 / (1 + 6.5%)³ = $827.85
PV of coupon payments = $60 x 2.64848 (PV annuity factor, 6.5%, 3 periods) = $158.91
New price of bond A = $986.76, this means that the price decreased by $13.24 or 1.32%.
New price of bond B:
PV of face value = $1,000 / (1 + 6.5%)¹⁵ = $388.83
PV of coupon payments = $60 x 9.40267 (PV annuity factor, 6.5%, 3 periods) = $564.16
New price of bond B = $952.99, this means that the price decreased by $47.01 or 4.7%.
