Question

Laurel, Inc., and Hardy Corp. both have 10 percent coupon bonds outstanding, with semiannual interest payments, and both are currently priced at the par value of $1,000. The Laurel, Inc., bond has six years to maturity, whereas the Hardy Corp. bond has 19 years to maturity.If interest rates suddenly rise by 2 percent, what is the percentage change in the price of each bond?

Answer 1

Answer:

Laurel = -8.38%

Hardy = -14.85%

Explanation:

Present Price of Bond :

Laurel, Inc. = $1000

Hardy Corp. = $1000

After Percentage Price would be

Laurel, Inc = Present Value (i=6%, n=12, PMT=50, FV=1000)  = $916.16

Hardy Corp = Present Value (i=6%, n=30, PMT=50, FV=1000)  = $851.54

Percentage change in price

Laurel, Inc = (916.16-1000)/1000 = -8.38%

Hardy Corp = (851.54-1000)/1000 = -14.85%