ces Both Bond Sam and Bond Dave have 8 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has three years to maturity, whereas Bond Dave has 20 years to maturity. a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam and Bond Dave? (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.lf rates were to suddenly fall by 2 percent instead, what would be the percentage change in the price of Bond Sam and Bond Dave? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a. Bond Sam a. Bond Dave b. Bond Sam b. Bond Dave % % % %

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
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### Understanding Bond Price Sensitivity to Interest Rate Changes

**Context:**  
Both Bond Sam and Bond Dave have 8 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has three years to maturity, whereas Bond Dave has 20 years to maturity.

#### Exercise:
a. **Interest Rate Increase Scenario:**
- If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam and Bond Dave?  
  *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. **Interest Rate Decrease Scenario:**
- If rates were to suddenly fall by 2 percent instead, what would be the percentage change in the price of Bond Sam and Bond Dave?  
  *Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.*

#### Response Table:
- a. Bond Sam: _____ %
- b. Bond Dave: _____ %
- a. Bond Sam: _____ %
- b. Bond Dave: _____ %

This exercise helps students understand the sensitivity of bond prices to changes in interest rates. The duration of the bond significantly affects how much its price changes.
Transcribed Image Text:### Understanding Bond Price Sensitivity to Interest Rate Changes **Context:** Both Bond Sam and Bond Dave have 8 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has three years to maturity, whereas Bond Dave has 20 years to maturity. #### Exercise: a. **Interest Rate Increase Scenario:** - If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam and Bond Dave? *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. **Interest Rate Decrease Scenario:** - If rates were to suddenly fall by 2 percent instead, what would be the percentage change in the price of Bond Sam and Bond Dave? *Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.* #### Response Table: - a. Bond Sam: _____ % - b. Bond Dave: _____ % - a. Bond Sam: _____ % - b. Bond Dave: _____ % This exercise helps students understand the sensitivity of bond prices to changes in interest rates. The duration of the bond significantly affects how much its price changes.
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