Suppose you want to compare the price sensitivity of two 10-year bonds. Bond A Has a par value of $1,000. Has a coupon rate of 5 percent with coupon payments made annually. . The initial required rate of return, k, is 8 percent. Bond B Has a par value of $1,000. Has a coupon rate of 10 percent with coupon payments made annually The initial required rate of retum, k, is 8 percent. Suppose the producer price index indicates that prices may soon decrease by as much as 1.5 percent, which results in an investor's required rate of return on a bond to decrease to 7%. Using this information, now in the values for the percentage change in bond price, percentage change ink, and bond price elasticity for each bond in the table Initial Price of Bonds when k8% Percentage Change in Bond Price Bonds: Pride of Bonds when k7% $859.53 $1,210.71 Percentage Change ink Bond Price Elasticity (P3 Bond A $798.70 $1,134,20 Bond B Now suppose that instead the producer price index indicates that prices may soon increase by as much as 1.2 percent, which results in an investors required rate of return on a bond to increase to 12% Using this information, fill in the values for the percentage change in bond price, percentage change ink, and bond price elasticity for each bond is the table. Using this linformation All in the values for the percentage change in bond price, percentage change in k, and bond price elasticity for each bond in the table. Percentage Change in Bond Price Percentage Change in Bond Price Elasticity (P3 bonds with a Coupon Rate of Bond A Bond B Initial Price of Bonds when k=8% $798.70 $1,134,20 Price of Bonds when k = 12% $604.48 $887.00 Based on the calculations, it can be said that the bond price elasticity is between interest rate movements and bond price movements. in each scenario, which reflects relationship The price elasticity of bond A with a required rate of return of 7 percent can be interpreted as: O A 1 percent increase in interest rates leads to a 0.609 percent decrease in the price of the bond. O A 1 percent increase in interest rates loups to a 0.540 percent decrease in the price of the bond. O A 1 percent decrease in interest rates leads to a 0.609 percent decrease in the price of the bond. A1 percent increase in interest rates leads to a 0.609 percent Increase in the price of the bond. Based on the calculations, it can be said that a bond with a low required rate of return is rate of return price sensitive than a bond with a high required
