Final answer:
The percentage price change of bonds J and S when interest rates rise by 3 percent would result in a decrease in their prices. Bond S with higher coupon payments will generally experience a smaller price change than Bond J with lower coupon payments. Detailed calculations would require applying the present value formula considering the new YTM of 13.8 percent.
Step-by-step explanation:
To determine the percentage price change of bonds J and S when interest rates rise by 3 percent, we must understand the relationship between bond prices and interest rates. Both these bonds have a yield to maturity (YTM) of 10.8 percent and make semiannual payments. When interest rates rise, the present value of a bond's future cash flows, which consist of the coupon payments and the par value, falls.
For a bond with a higher coupon rate (Bond S with 14.9 percent), the price change is generally less than that of a bond with a lower coupon rate (Bond J with 4.9 percent) for the same change in interest rates due to the higher cash flow received earlier.
However, exact calculations would require the use of the bond price formula or a financial calculator to derive the present value of future cash flows with the new yield to maturity, which would now be 13.8 percent (10.8% + 3%).
Considering the investor perspective, when interest rates rise, as per our example, the yield or total return will also include capital gains or losses due to the change in the bond's price.