Bond J has a coupon rate of 4.2 percent. Bond K has a coupon rate of 14.2 percent. Both bonds have ten years to maturity, a par value of $1,000, and a YTM of 9.4 percent, and both make semiannual payments. a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b. If interest rates suddenly fall by 2 percent instead, what is the percentage change in the price of these bonds? Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. a. Percentage change in price b. Percentage change in price Bond J 9.40 % % Bond K 12.83 %

Bond J has a coupon rate of 4.2 percent. Bond K has a coupon rate of 14.2 percent. Both bonds have ten years to maturity, a par value of $1,000, and a YTM of 9.4 percent, and both make semiannual payments. a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b. If interest rates suddenly fall by 2 percent instead, what is the percentage change in the price of these bonds? Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. a. Percentage change in price b. Percentage change in price Bond J 9.40 % % Bond K 12.83 %

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Related questions

Q: A 20-year bond has a coupon rate of 8 percent, and another bond of the same maturity has a coupon…

A: A bond is an instrument that represents the loan that is made by the investor to the company and…

Q: All rates in this problem are stated as decimals. Using the precise calculation formula, calculate λ…

A: The probability of default (PD) refers to the likelihood that a borrower (which can be an…

Q: 2. A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond…

A: A bond is a financial instrument which pays a fixed coupon to the bond holder. The price of the bond…

Q: Please explain why this is the formula. Problem to this solution: Suppose the yield on a 10-year…

A: MRP stands for Maturity Risk Premium. It is the extra returns required by the investors for keeping…

Q: Required: a. Suppose Baa-rated bonds currently yield 6%, while Aa-rated bonds yield 4%. Now suppose…

A: The confidence Index on bond's yield for top rate bond as compared to the lower graded bond than top…

Q: Bond J has a coupon of 4 percent. Bond K has a coupon of 8 percent. Both bonds have 10 years to…

Q: tations theory suggests that under certain conditions all bonds outstanding, especially Treasury…

A: Zero coupon do not pay any coupon during the life of bond but pay only face value of bond on…

Q: Please explain why this statement is (False). For a given interest rate change, a 20-year bond's…

A: Bond Prices and Interest Rate Changes: Bond prices are sensitive to interest rate changes; i.e. they…

Q: onsider a(n) Ten-year, 14.5 percent annual coupon bond with a face value of $1,000. The bond is…

A: Since you do not wants to answer for first 3 subparts, we hereby need to solve part (b) to solve…

Q: s a list of prices for zero-coupon bonds with different maturities and par value of $1,000. Suppose…

A: According to expectation theory short term interest should based on long term interest and both…

Q: Consider the following two Treasury securities: Bond A is sold at $120 with 5 years of modified…

A: The modified duration is an adjusted version of the Macaulay duration, which accounts for changing…

Q: Bond J is a 3.9% coupon bond. Bond K is a 9.9% coupon bond. Both bonds have 15 years to maturity,…

A: Coupon rate for bond J = 3.9%Coupon rate for Bond K = 9.9%Maturity =15 yearsYTM = 6.9%To find:If…

Q: Bond J has a coupon rate of 7.74 percent and 7 year to maturity. It makes semiannual payments, and…

A: The problem case focuses on calculating the % change in the price of the bond when the YTM of the…

Q: Both Bond A and Bond B have 9.4 percent coupons and are priced at par value. Bond A has 7 years to…

A: Bonds refer to the financial instrument issued by the government or financial institutions for…

Q: Bond J has a coupon rate of 5.4 percent. Bond K has a coupon rate of 15.4 percent. Both bonds have…

A: A bond provides access to debt capital from investors and other non-traditional sources for the…

Q: A 9-year bond has a yield of 14% and a duration of 8.157 years. If the market yield changes by 85…

A: The duration of bond show how much bond is sensitive to the interest rate that means how much prices…

Q: None

A: a) Statement showing duration of bondYearInterestRepayment of principalTotalPVIF @ 14%Present…

Q: The Faulk Corp. has a 7 percent coupon bond outstanding. The Yoo Company has an 11 percent bond…

A: The price of the bond changes with the change in interest rate and change in the coupon rate. If the…

Q: Consider the effect of an un-anticipated 1 basis point increase in the 5 year bond rate (x+) at time…

A: The link between the yields or interest rates of fixed-income products, such as bonds, and their…

Q: Consider the following bonds: (Click on the following icon in order to copy its contents into a…

A: Bonds are debt instruments issued by companies. The company that issues the bonds pays periodic…

Q: Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bonds have 18…

A: A bond is a fixed-income security that offers the investor a fixed set of coupon throughout the…

Q: Suppose the yield on a bond that pays $100 in one year is currently 2%. If interest rates suddenly…

A: The price of bond and rate are inversely related i.e., if interest rates rises, price of bond will…

Q: Everything else being equal, the price of which of the following bonds is most sensitive to interest…

A: A bond is a debt security that represents a loan made by an investor to a borrower, typically a…

Q: Which of the following statements is CORRECT? a. If a coupon bond is selling at par, its yield to…

A: A bond is a financial instrument that symbolizes a loan that an investor has given to a borrower,…

Q: Bond J has a coupon rate of 6 percent. Bond K has a coupon rate of 11 percent. Both bonds have 8…

A: A bond is a kind of debt security issued by the government and private companies to the public for…

Q: Bond J has a coupon of 7.8 percent. Bond K has a coupon of 11.8 percent. Both bonds have 12 years to…

A: The yield to maturity measures the bond's interest payments as well as any capital gains or losses…

Q: Consider the situation where zero rates, measured with continuous compounding, are as in the below…

A: To determine the theoretical price of a two-year bond with continuous compounding, we need to…

Q: P2. Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bonds have 19…

A: Computation of current price of the given bonds:Bond J and Bond K:

Q: Consider a bond with a coupon of 4.6 percent, five years to maturity, and a current price of…

A: Here,Increase in yield = 2%To Find:Part A. New price of the bond by using duration =?Part B. New…

Q: Consider two fixed coupon bonds with the same maturity 10Y and same face value F = 100. Bond 1 pays…

A: Several multiple choice questions have been given. We will handle them one by one.

Q: uppose that 6 months after you purchase the bond, the market rate for interest on this type of bond…

A: Bond valuation according to financial management is done by discounting all the expected future cash…

Concept explainers

Debenture Valuation

A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.

Note Valuation

It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:

Question

Bond J has a coupon rate of 4.2 percent. Bond K has a coupon rate of 14.2 percent. Both bonds have ten years to maturity, a par value
of $1,000, and a YTM of 9.4 percent, and both make semiannual payments.
a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds?
Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers
as a percent rounded to 2 decimal places, e.g., 32.16.
b. If interest rates suddenly fall by 2 percent instead, what is the percentage change in the price of these bonds?
Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.
a. Percentage change in price
b. Percentage change in price
Bond J
9.40 %
%
Bond K
12.83 %

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Basic Introduction

Step 2: Solution a

Step 3: Solution b.

Solution

Trending now

This is a popular solution!

Step by step

Solved in 4 steps with 3 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

Am. 101.
Bond J has a coupon rate of 4.2 percent. Bond K has a coupon rate of 14.2 percent. Both bonds have ten years to maturity, a par value of $1,000, and a YTM of 9.4 percent, and both make semiannual payments. a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. If interest rates suddenly fall by 2 percent instead, what is the percentage change in the price of these bonds? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Bond J Bond K a percentage change in price % % b percentage change in price % %
Suppose that the current one-year rate (one-year spot rate) and expected one-year government bonds over years 2, 3 and 4 are as follows: 1R1 = 4.80%, E(201) = 5.45%, E(3r1) = 5.95%, E(41) = 6.10% Assume that there are no liquidity premiums. To the nearest basis point, what is the current rate for the four-year-maturity government bond? < A. 5.57% B. 5.62% C. 5.83% D. 6.10%
3. Assume that the real risk-free rate, k*, is 3 percent and that inflation is expected to be 8 Treasury bonds are highly liquid and free of default risk. If 2-year and 5-year Treasury bonds both yield 10 percent, what is the difference in the maturity risk premiums (MRPS) on the two bonds; that is, what is MRP5 minus MRP2?
The longer the term a bond has before it matures, ______________ will be the affect on its value due to a 1% change in market interest rates. Select one: a. The lower b. Either A or B depending on the direction of the interest change c. Neither A or B, since bond maturity has no impact on interest rate sensitivity. d. The greater
Consider the following pure discount bonds with face value $1,000: Maturity Price 1 952.38 2 898.47 3 847.62 4 799.64 5 754.38 a). Find the spot rates and draw a yield curve.b). Assume that there is a constant liquidty premium that is equal to 1% across all maturities. Find the forward rates and the expected one period future interest rates.
A 20-year bond has a coupon rate of 8 percent, and another bond of the same maturity has a coupon rate of 15 percent. If the bonds are alike in all other respects, which will have the greater relative market price decline if interest rates increase sharply? Why?
a. What is the duration of a two-year bond that pays an annual coupon of 11.5 percent and has a current yield to maturity of 13.5 percent? Use $1,000 as the face value. (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616)) b. What is the duration of a two-year zero-coupon bond that is yielding 11.5 percent? Use $1,000 as the face value. a. Duration b. Duration years years
Both Bond A and Bond B have 9.8 percent coupons and are priced at par value. Bond A has 9 years to maturity, while Bond B has 20 years to maturity. a. If interest rates suddenly rise by 2.4 percent, what is the percentage change in price of Bond A and Bond B? Note: A negative value should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Bond A Bond B %A in Price % % b. If interest rates suddenly fall by 2.4 percent instead, what would be the percentage change in price of Bond A and Bond B? Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. %A in Price Bond A %
3. The following is a list of prices for zero-coupon bonds with different maturities and par value of $1,000. Suppose the interest rate is compounded once per year. Maturity (Years) Price ($) 970 960 910 870 1 2 3 4 Answer the following questions: (a) What is, according to the expectations theory, the one-year interest rate in the second year? (b) What is, according to the expectations theory, the one-year interest rate in the third year? (c) What is, according to the expectations theory, the one-year interest rate in the forth year?
Consider the following bonds: Bond A B CD с Coupon Rate (annual payments) 0.0% 0.0% 4.3% 7.7% The percentage change in the price of bond A is |___%. (Round to one decimal place.) What is the percentage change in the price of each bond if its yield to maturity falls from 6.9% to 5.9%? The percentage change in the price of bond B is %. (Round to one decimal place.) Maturity (years) 15 The percentage change in the price of bond C is %. (Round to one decimal place.) The percentage change in the price of bond D is %. 21500
Consider a bond with a coupon of 5 percent, seven years to maturity, and a current price of $1,052.80. Suppose the yield on the bond suddenly increases by 2 percent. a. Use duration to estimate the new price of the bond. Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Price b. Calculate the new bond price using the usual bond pricing formula. Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Price