Suppose you want to compare the price sensitivity of two 10-year bonds. Bond A Has a...
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Suppose you want to compare the price sensitivity of two 10-year bonds. Bond A •Has a par value of $1,000. Has a coupon rate of 5 percent with coupon payments made annually. The initial required rate of return, k, is 8 percent. Bond B • Has a par value of $1,000. Has a coupon rate of 10 percent with coupon payments made annually. • The initial required rate of return, k, is 8 percent. Suppose the federal government announces that it will be running a smaller budget deficit than it anticipated, which results in an investor's required rate of return on a bond to decrease to 6%. Using this information, fill in the values for the percentage change in bond price, percentage change in k, and bond price elasticity for each bond in the table. Initial Price of Bonds Bonds: Bond A when k = 8% Price of Bonds when k = 6% Percentage Change in Bond Price Percentage Change in k Bond Price Elasticity (Pb) Bond B $798.70 $1,134.20 $926.40 $1,294.40 Now suppose that instead the federal government announces that it will be running a larger budget deficit than it anticipated, which results in an investor's required rate of return on a bond to increase to 12%. Suppose you want to compare the price sensitivity of two 10-year bonds. Bond A •Has a par value of $1,000. Has a coupon rate of 5 percent with coupon payments made annually. The initial required rate of return, k, is 8 percent. Bond B • Has a par value of $1,000. Has a coupon rate of 10 percent with coupon payments made annually. • The initial required rate of return, k, is 8 percent. Suppose the federal government announces that it will be running a smaller budget deficit than it anticipated, which results in an investor's required rate of return on a bond to decrease to 6%. Using this information, fill in the values for the percentage change in bond price, percentage change in k, and bond price elasticity for each bond in the table. Initial Price of Bonds Bonds: Bond A when k = 8% Price of Bonds when k = 6% Percentage Change in Bond Price Percentage Change in k Bond Price Elasticity (Pb) Bond B $798.70 $1,134.20 $926.40 $1,294.40 Now suppose that instead the federal government announces that it will be running a larger budget deficit than it anticipated, which results in an investor's required rate of return on a bond to increase to 12%.
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To calculate the percentage change in bond price we can use the following formula Percentage Change ... View the full answer
Related Book For
Introduction to Financial Accounting
ISBN: 978-0133251036
11th edition
Authors: Charles Horngren, Gary Sundem, John Elliott, Donna Philbrick
Posted Date:
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