Question

Bond J has a coupon rate of 6 percent and Bond K has a coupon rate of 12 percent. Both bonds have 15 years to maturity, make semiannual payments, and have a YTM of 9 percent.

a.	What if rates suddenly fall by 2 percent instead? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Particulars	Bond J	Bond K
Payment(Assumed)	$ 1,000	$ 1,000
Coupon rate	6%	12%
Years to maturity	15	15
YTM	9%	9%
Coupon	$ 60	$ 120
Step 2. Semi annual
Coupon payment	$ 30	$ 60
Years to maturity	30	30
YTM	4.5%	4.5%
Current Price	$ 755.67	$ 1,244.33
Step 3. After the fall in interest rate
Coupon payment	$ 30	$ 60
Years to maturity	30	30
YTM	3.5%	3.5%
New Price	$ 908.04	$ 1,459.79
Change in price	20.16%	17.32%

Please refer the calculation done below.

Refer the calculation below for the calculation of price

Price of bond J = $ 755.67

Calculation of price of bond K

Price of bond K = $ 1,244.33

When interest rate falls by 2% then the YTM will decline by 2%. Thus, the semi annual YTM = 3.5%

Price of bond J after the decrease in interest rate

Calculation of price of bond K

Now calculate the percent change in price

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