Both bonds have eleven years to maturity, make semiannual payments, a par value of $1,000, and have a YTM of 9.6 percent. If interest rates suddenly rise by 3 percent, what is the percentage price change of these bonds?

Business & Finance homework help| Business & Finance homework help

The percentage price change of Bond J and Bond S when interest rates rise by 3 percent can be calculated using the formula: P1 = (Rate/YTM-1)*PV.

For bond J, the calculation would be: P1 = (4.3/9.6-1)*1000 = -44.8%. If interest rates rise suddenly by 3% the Bond J price will drop by 44.8%.

For bond S, the calculation would be: P1=(14.3/9.6-1)*1000=48.4%. The price of Bond S would increase 48.4% in the event that interest rates rose by just 3%.

These calculations show that different bonds are affected differently by an increase in the market interest rate. Bonds with lower coupon rates will be more susceptible to interest rate changes than those with higher coupons rates.

The findings show that investors need to consider both the current and future trends in selecting their investments when constructing portfolios, so as to minimize risk but still achieve long-term returns.