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please review it for me and let me know if i calculated them correctly. thanks Interest Rate Risk: Bond J has a Coupon Rate of
please review it for me and let me know if i calculated them correctly. thanks
Interest Rate Risk: Bond J has a Coupon Rate of 3%. Bond K has a Coupon Rate of 9%. Both bonds have 18 years to maturity, make semi-annual payments, and a Yield to Maturity of 6%. If interest rates suddenly rise by 2% what is the percentage price change of these bonds? What if rates suddenly fall by 2% instead? What does this problem tell you about the interest rate risk of lower coupon bonds? Current price: bond J=672.52 Current price: bond K=1,327.48 If interest rates suddenly rise by 2%, the percentage price change of these bonds: Bond J J=527.29 percentage =21.59%[(527.29672.52)/672.52] Bond K=1,094.54 percentage =17.55%[(1,094.541,327.48)/1,327.48] if rates suddenly fall by 2% Bond J=872.56 percentage =29.74% Bond K=1,637.22 percentage =23.33% What does this problem tell you about the interest rate risk of lower coupon bonds? If the interest rate of the bond rises then bond value would be decrease and if the interest rate of the bond falls, then the price of the bond would be increase. So, it is the inverse relation between the bond price and the interest rates Step by Step Solution
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