Answer:
Change in Bond A price is -11.01%
Change in Bond B price is -16.64%
Step-by-step explanation:
The starting to solving this question would be to calculate the initial prices of both bonds at 9.6% and their prices when interest rose by 2.2%
When bonds are issued at par of $1000 both yield to maturity and coupon rate are the same.invariably the bonds were issued at $1000 each
However,when yield to maturity increases by 2.2%,the new yield to maturity is 9.6%+2.2%=11.8%,the new prices can determined as follows:
The bond price can be computed by using the pv formula in excel,which is given below:
=-pv(rate,nper,pmt,fv)
Bond A
rate is now 11.8%
nper is the number of times the bond pays coupon interest over the life of the bond,which is 8
pmt is the annual coupon payable by the bond,which is $1000*9.6%=$96
fv is the face value of $1000 at which the bond would be retired.
=-pv(11.8%,8,96,1000)=$ 889.94
Change in Bond A price=($889.94-$1000)/$1000=-11.01%
Bond B
rate is now 11.8%
nper is the number of times the bond pays coupon interest over the life of the bond,which is 20
pmt is the annual coupon payable by the bond,which is $1000*9.6%=$96
fv is the face value of $1000 at which the bond would be retired.
=-pv(11.8%,20,96,1000)=$833.59
Change in Bond B price=($833.59-$1000)/$1000=-16.64%