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Consider the following two bond issues. Bond M: 4% 30-year bond Bond N: 6% 30-year bond Neither bond...

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Finance

Consider the following two bond issues.

Bond M: 4% 30-year bond

Bond N: 6% 30-year bond

Neither bond has an embedded option. Both bonds are trading inthe market at the same yield.

Which bond will fluctuate more in price when interest rateschange? Why?

Answer & Explanation Solved by verified expert
3.6 Ratings (584 Votes)

Bond M: 4% 30-year bond
Face Value=$1000
N C A=C*N B=A/(1.04^N)
Year Cashflow Year*casflow PV of A
1 $40 $40 38.46154
2 $40 $80 73.9645
3 $40 $120 106.6796
4 $40 $160 136.7687
5 $40 $200 164.3854
6 $40 $240 189.6755
7 $40 $280 212.777
8 $40 $320 233.8209
9 $40 $360 252.9312
10 $40 $400 270.2257
11 $40 $440 285.8156
12 $40 $480 299.8066
13 $40 $520 312.2985
14 $40 $560 323.386
15 $40 $600 333.1587
16 $40 $640 341.7012
17 $40 $680 349.0938
18 $40 $720 355.4122
19 $40 $760 360.7282
20 $40 $800 365.1096
21 $40 $840 368.6202
22 $40 $880 371.3207
23 $40 $920 373.2682
24 $40 $960 374.5166
25 $40 $1,000 375.1168
26 $40 $1,040 375.1168
27 $40 $1,080 374.5619
28 $40 $1,120 373.4948
29 $40 $1,160 371.9556
30 $40 $1,200 369.9824
8734.155
Bond duration 8.734155 (8734.155/1000)
Bond N: 6% 30-year bond
Face value=$1000
N C A=C*N B=A/(1.04^N)
Year Cashflow Year*casflow PV of A
1 $60 $60 56.60377
2 $60 $120 106.7996
3 $60 $180 151.1315
4 $60 $240 190.1025
5 $60 $300 224.1775
6 $60 $360 253.7858
7 $60 $420 279.324
8 $60 $480 301.1579
9 $60 $540 319.6252
10 $60 $600 335.0369
11 $60 $660 347.6798
12 $60 $720 357.8179
13 $60 $780 365.6944
14 $60 $840 371.5328
15 $60 $900 375.5386
16 $60 $960 377.9004
17 $60 $1,020 378.7917
18 $60 $1,080 378.3713
19 $60 $1,140 376.7848
20 $60 $1,200 374.1657
21 $60 $1,260 370.6358
22 $60 $1,320 366.3067
23 $60 $1,380 361.2802
24 $60 $1,440 355.6491
25 $60 $1,500 349.4979
26 $60 $1,560 342.9036
27 $60 $1,620 335.9361
28 $60 $1,680 328.6586
29 $60 $1,740 321.1287
30 $60 $1,800 313.3982
9367.417
Bond duration 9.367417 (9367.417/1000)
Duration of M 8.734155
Duration of N 9.367417
Bond duration indicates sensitivity of a bond pice to change in interest rate
Higher the bond duration higher will be the sensitivity to change in interest rate
Hence Bond N will flatuate more in price with interest rate change

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Transcribed Image Text

Consider the following two bond issues.Bond M: 4% 30-year bondBond N: 6% 30-year bondNeither bond has an embedded option. Both bonds are trading inthe market at the same yield.Which bond will fluctuate more in price when interest rateschange? Why?

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