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Effect of change in interest rate on price of a bond

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Both Bond Sam and Bond Dave have 9 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 4 years to maturity, whereas Bond Dave has 15 years to maturity. If interest rates suddenly rise by 3 percent, the percentage change in the price of Bonds Sam and Dave is ??? percent and ??? percent, respectively.

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The solution studies the effect of change in interest rate on the price of a bond.

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Let us consider the case of Bond Dave
Face Value of bond=P=$1000
Current Price of bond=Par Value of bond=$1000
Number of coupon payments left=n=15*2=30
Required rate of return=Coupon rate=9%/2=4.5% per semi annual (Since bonds are selling at ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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