Question

The Faulk Corp. has a 5 percent coupon bond outstanding. The Gonas Company has a 11 percent bond outstanding. Both bonds have 13 years to maturity, make semiannual payments, and have a YTM of 8 percent.

If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds?

What if interest rates suddenly fall by 2 percent instead?

Answer 1

Faulk corp. Bond rise by 2% interest rate 10% interest rate 8% 26 fall by 2% interest rate 6% 26 NPER = Number of coupon payments (13*2) (13*2) (13*2) rate = rate per period = YTM/2 0.04 (8%/2) 0.05 (10%/2) 0.03 (6%/2) PMT = coupon paid per period (1000*5%/2) 25 (1000*5%/2) 25 (1000*5%/2) FV = Face value 1000 1000 1000 PV = PRICE = $760.26 $910.62 Gonas co. Bond $640.62 Price =-PV(RATE,NPER,PMT,FV) rise by 2% interest rate 10% (13*2) (13*2) interest rate 8% 26 fall by 2% interest rate 6% 26 NPER = Number of coupon payments 26 (13*2) rate =rate per period = YTM/2 0.04 (8%/2) 0.05 (10%/2) 0.03 (6%/2) PMT = coupon paid per period 55 (1000*11%/2) 55 (1000*11%/2) 55 (1000*11%/2) FV = Face value 1000 1000 1000 Pv = PRICE = $1,239.74 $1,446.92 $1,071.88 Price =-PV(RATE,NPER,PMT,FV)

-15.74% -13.54% (640.62-760.26)/760.26 (1071.88-1239.74)/1071.88 Requirement 1: If interest rate rises by 2%: percentage change in price of faulk corp. percentage change in price of Gonas co. Requirement 2: If interest rate falls by 2%: percentage change in price of faulk corp. percentage change in price of Gonas co. 19.77% 16.71% (910.62-760.26)/760.26 (1446.92-1239.74)/1071.88