Question

Interest Rate Risk. Bond J is a 5% coupon bond. Bond K is an 10% coupon bond. Both bonds have 12 years to maturity, make semiannual payments, and have an YTM of 5.00%. 9a. If interest rates suddenly change (rise) by 4.00% (YTM is now 9.00%), the percentage price change of bond J is _______%. 9a. Points: 5.0 9b. If interest rates suddenly change (rise) by 4.00% (YTM is now 9.00%), the percentage price change of bond K is _______%. 9b. Points: 5.0 9c. If interest rates suddenly change (fall) by -4.00% (YTM is now 1.00%), the percentage price change of bond J is _______%. 9c. Points: 5.0 9d. If interest rates suddenly change (fall) by -4.00% (YTM is now 1.00%), the percentage price change of bond K is _______%. 9d. Points: 5.0

Answer 1

The percentage price change of bond J and bond K is -48.00% when interest rates rise by 4.00%, and 48.00% when interest rates fall by -4.00%.

Step-by-step explanation:

The percentage price change of bond J, when interest rates suddenly rise by 4.00% (YTM is now 9.00%), can be calculated using the formula:

Percentage price change = -Duration * Change in yield

For bond J, the duration is 12 years, which is equal to the time to maturity. Therefore, the percentage price change of bond J would be -12 * 4.00% = -48.00%.

The percentage price change of bond K, under the same scenario, would be -12 * 4.00% = -48.00%.

When interest rates suddenly fall by -4.00% (YTM is now 1.00%), the percentage price change of bond J would be -12 * -4.00% = 48.00%.

Similarly, the percentage price change of bond K would also be 48.00%.