Bond J has a coupon rate of 5 percent and Bond K has a coupon rate of 11 percent. Both bonds have 14 years to maturity, make semiannual payments, and have a YTM of 8 percent. a. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds?

Bond J -16.33%

Bond K -14.04%

Explanation:

In order to determine the percentage price change it is incumbent to establish the bonds' prices with YTM of 8% as well as when interest rises by 2% so as to calculate the price change percentage.

The pv formula can be used to establish the prices as follows:

=-pv(rate,nper,pmt,fv)

rate is semiannual yield to maturity of both bonds which 8%/2=4%

nper is the number of coupon interest payable by the bonds which 14 years multiplied by 2 i.e 28

pmt is the semiannual coupon payment by the bonds:

Bond J=$1000*5%/2=$25

Bond K=$1000*11%/2=$55

fv is the face of the bonds which is $1000 in  both cases

Price of bond J;

=-pv(4%,28,25,1000)=$ 750.05  

Price of Bond K:

=-pv(4%,28,55,1000)=$1,249.95  

New price with 2% increase in interest

Yield previously 8%

plus increase      2%'

total                     10%

divided by 2=10%/2=5%

Price of bond J;

=-pv(5%,28,25,1000)=$627.55  

Price of Bond K:

=-pv(5%,28,55,1000)=$ 1,074.49  

Change in price=new price-old price/old price

Bond J=($627.55-$ 750.05)/$ 750.05=-16.33%

Bonk K=($1,074.49-$1,249.95)/$1,249.95  =-14.04%

answer; ///retained

if you use only 25 for your entertainment and only 200 for the groceries that you really need and take out the 50 per month for the computer then that should be enough