1. (12 points) Bond A is a semiannually compounded, zero-coupon bond with a face value of $1,000.00. At issuance, the market interest rate for bonds with a similar risk profile was 6.50%. For Bond A, given different bond maturities (Column A), compute Bond A’s price at a market interest rate of 6.50% (Column B) and 10.00% (Column C). Next, compute the percent change in Bond A’s prices as the market interest rate increases from 6.50% to 10.00% (Column D). Essentially, Column D is measuring the bond’s sensitivity to interest rate changes. (A) (B) (C) (D) (C – B) / B Time to Maturity (Years) I/YR = 6.50% I/YR = 10% % Δ Price 1 5 15 30
2. (12 points) Bond B is identical to Bond A EXCEPT it has an 8.00% coupon rate. For Bond B, given different bond maturities (Column A), compute Bond B’s price at a market interest rate of 6.50% (Column B) and 10.00% (Column C). Next, compute the percent change in Bond B’s prices as the market interest rate increases from 6.50% to 10.00% (Column D). (A) (B) (C) (D) (C – B) / B Time to Maturity (Years) I/YR = 6.50% I/YR = 10% % Δ Price 1 5 15 30
3. (6 points) How does a bond’s time to maturity affect bond price sensitivity (Column D)?
4. (6 points) How does a bond’s coupon rate affect bond price sensitivity (Column D)? 5. (4 points) For both scenarios (I/YR = 6.50% and 10%), determine whether Bond A and Bond B are premium or discount bonds?