Solution:
Each bonds have a 7 percent coupon limit. Since sales are also equivalent to 7 percent with par with YTM. The age of Bond Sam is three years and the maturity of Bond Dave is sixteen. At a sudden increase of 2%, interest rates. Decide the shift in both bond price by percentage.
Bond Sam:
Bond Value = pv(rate,nper,pmt,fv)
Rate = (7%+2%)* 1/2 = 4.5%
nper = 3*2 = 6
fv = 1000
pmt = 7%*1000*1/2 = $35
Bond Value = -pv (4.5%,6,35,1000)
Bond Value =$936.65
Percentage change in the price of Bond Sam = (936.65-1000)/1000 Percentage change in the price of Bond Sam = -6.33%
Bond Dave:
Bond Value = pv (rate, nper, pmt, fv)
Rate = (7%+2%)*1/2 = 4.5%
nper = 16*2 = 32
fv = 1000
pmt = 7%*1000*1/2 = 35
Bond Value = pv (4.5%,32,35,1000)
Bond Value = $854.66
Percentage change in the price of Bond Dave = (854.66-1000)/1000 Percentage change hi the price of Bond Dave = -14.53%
