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 9 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 return, k, is 9 percent. Suppose the U.S. announces that it expects the unemployment rate to increase significantly this year, which results in an investor's required rate of return on a bond to decrease to 5%. Using this information, fill in the values for the percentage change in bond price, percentage change in k, and bond price elasticity for each bond in the table. Suppose the U.S. announces that it expects the unemployment rate to increase significantly this year, which results in an investor's required rate of return on a bond to decrease to 6%. Using this information, fill in the values for the percentage change in bond price, percentage change in k, and bond price elasticity for each bond in the table. Price of Bonds when k=6% Percentage Change in Bond Price Percentage Change in k Bond Price Elasticity (P) Bonds: Initial Price of Bonds when k = 9% $743.29 $1,064.18 Bond A $926.40 Bond B $1,294.40 Now suppose that instead the U.S. announces that it expects the unemployment rate to decrease significantly this year, which results in an investor's 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 in k, and bond price elasticity for each bond in the table. Bonds with a Coupon Rate of: Bond A Initial Price of Bonds when k=9% Price of Bonds when k= 12% Percentage Change in Bond Price Percentage Change in k Bond Price Elasticity (P) $743.29 $604.48 Bond B $1,064.18 $887.00 in each scenario, which reflects relationship Based on the calculations, it can be said that the bond price elasticity is between interest rate movements and bond price movements. price, per price elasticity for each Using this information, Tilt in the values for the the table. Bonds with a Coupon Rate of: Initial Price of Bonds when k= 9% Price of Bonds when k = 12% Percentage Change in Bond Price Percentage Change in k Bond Price Elasticity (P) Bond A $743.29 $604.48 Bond B $1,064.18 $887.00 in each scenario, which reflects relationship Based on the calculations, it can be said that the bond price elasticity is between interest rate movements and bond price movements. The price elasticity of bond B with a required rate of return of 6 percent can be interpreted as: O A 1 percent increase in interest rates leads to a 0.739 percent decrease in the price of the bond. O A 1 percent decrease in interest rates leads to a 0.649 percent decrease in the price of the bond. O A 1 percent increase in interest rates leads to a 0.649 percent decrease in the price of the bond. O A 1 percent increase in interest rates leads to a 0.649 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 price sensitive than a bond with a high required rate of return
