a. If interest rates suddenly rise by 3 percent, what is the percentage change in the price of Bond Sam? b. If interest rates suddenly rise by 3 percent, what is the percentage change in the price of Bond Dave? c. If rates were to suddenly fall by 3 percent instead, what would the percentage change in the price of Bond Sam be then d. If rates were to suddenly fall by 3 percent instead, what would the percentage change in the price of Bond Dave be then?

a. If interest rates suddenly rise by 3 percent, what is the percentage change in the price of Bond Sam? b. If interest rates suddenly rise by 3 percent, what is the percentage change in the price of Bond Dave? c. If rates were to suddenly fall by 3 percent instead, what would the percentage change in the price of Bond Sam be then d. If rates were to suddenly fall by 3 percent instead, what would the percentage change in the price of Bond Dave be then?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.

Question

5. Both Bond Sam and Bond Dave have 6 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 4 years to maturity, whereas Bond Dave has 19 years to maturity.
a. If interest rates suddenly rise by 3 percent, what is the percentage change in the price of Bond Sam?
b. If interest rates suddenly rise by 3 percent, what is the percentage change in the price of Bond Dave?
c. If rates were to suddenly fall by 3 percent instead, what would the percentage change in the price of Bond Sam be then
d. If rates were to suddenly fall by 3 percent instead, what would the percentage change in the price of Bond Dave be then?

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QUESTION 5 According to the liquidity preference hypothesis, which of the following statements is correct? a. If term structure of interest rate is flat, then future short-term rates are expected to keep unchanged. b. The return on investing a two-year bond equals the return of two one-year rollover investments. C. If term structure of interest rate is upward, then future short-term rates are expected to increase. O d. If term structure of interest rate is downward, then future short-term rates are expected to decrease. e. The return on investing a two-year bond is less than the return of two one-year rollover investments.
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