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Both Bond Sam and Bond Dave have 8 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 4 years to maturity, whereas Bond Dave has 18 years to maturity. If interest rates suddenly rise by 4 percent, what is the percentage change in the price of Bond Sam

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Answer:

$875.80

Explanation:

Bond Sam has an 8% semiannual coupon rate, matures in 4 years and is sold at par value ($1,000)

if market interest rates increase by 4%, then Bond Sam's market value = PV of face value + PV of coupon payments

  • PV of face value = $1,000 / (1 + 6%)⁸ = $627.41
  • PV of coupon payments = coupon x PV annuity factor = $40 x 6.2098 (6%, n = 8) = $248.39

Bond Sam's market value = $627.41 + $248.39 = $875.80

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