Business, 18.11.2020 17:00 arushiverma555

Laurel, Inc., and Hardy Corp. both have 9 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has four years to maturity, whereas the Hardy Corp. bond has 15 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds?(Negative answers should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e. g., 32.16))

Percentage change in price of Laurel%
Percentage change in price of Hardy%
If interest rates were to suddenly fall by 2 percent instead, what would the percentage change in the price of these bonds be then? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e. g., 32.16))

Percentage change in price of Laurel%
Percentage change in price of Hardy%

Answers: 2

Show answers

Answers

Answer from: lodridge

If interest rate rises by 2%

Laurel Inc:

Percentage change in price = -0.0633 or -6.33%

Hardy Corp:

Percentage change in price = -0.1453 or -14.53%

If interest rate falls by 2%

Laurel Inc:

Percentage change in price = 0.06874 or 6.874%

Hardy Corp:

Percentage change in price = 0.1839 or 18.39%

Explanation:

Lets assume that both the bonds have a face value of $1000 and an initial coupon rate and interest rate of 9%. As the bonds are priced at par initially, this means that the interest rate or YTM is also 9%

If interest rates rises by 2%

We will first calculate the price of both the bonds then calculate the percentage change in prices.

To calculate the price of the bond today, we will use the formula for the price of the bond. As the bond is a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,

When interest rates rise by 2%.

Laurel Inc

Coupon Payment (C) = 1000 * 0.09 * 6/12 = 45

Total periods (n) = 4 * 2 = 8

New interest rate = 9% + 2% = 11%

New interest rate or YTM (semi annual) = 0.11 * 6/12 = 0.055 or 5.5%

The formula to calculate the price of the bonds today is attached.

Bond Price = 45 * [( 1 - (1+0.055)^-8) / 0.055] + 1000 / (1+0.055)^8

Bond Price = $936.6543 rounded off to $936.65

Percentage change in price = (936.65 - 1000) / 1000 = -0.0633 or -6.33%

Hardy Corp

Coupon Payment (C) = 1000 * 0.09 * 6/12 = 45

Total periods (n) = 15 * 2 = 30

New interest rate = 9% + 2% = 11%

New interest rate or YTM (semi annual) = 0.11 * 6/12 = 0.055 or 5.5%

The formula to calculate the price of the bonds today is attached.

Bond Price = 45 * [( 1 - (1+0.055)^-30) / 0.055] + 1000 / (1+0.055)^30

Bond Price = $854.6625 rounded off to $854.66

Percentage change in price = (854.66 - 1000) / 1000 = -0.1453 or -14.53%

When interest rate falls by 2%

Laurel Inc

Coupon Payment (C) = 1000 * 0.09 * 6/12 = 45

Total periods (n) = 4 * 2 = 8

New interest rate = 9% - 2% = 7%

New interest rate or YTM (semi annual) = 0.07 * 6/12 = 0.035 or 3.5%

The formula to calculate the price of the bonds today is attached.

Bond Price = 45 * [( 1 - (1+0.035)^-8) / 0.035] + 1000 / (1+0.035)^8

Bond Price = $1068.7395 rounded off to $1068.74

Percentage change in price = (1068.74 - 1000) / 1000 = 0.06874or 6.874%

Hardy Corp

Coupon Payment (C) = 1000 * 0.09 * 6/12 = 45

Total periods (n) = 15 * 2 = 30

New interest rate = 9% - 2% = 7%

New interest rate or YTM (semi annual) = 0.07 * 6/12 = 0.035 or 3.5%

The formula to calculate the price of the bonds today is attached.

Bond Price = 45 * [( 1 - (1+0.035)^-30) / 0.035] + 1000 / (1+0.035)^30

Bond Price = $1183.9204 rounded off to $1183.92

Percentage change in price = (1183.92 - 1000) / 1000 = 0.1839 or 18.39%

Laurel, Inc., and Hardy Corp. both have 9 percent coupon bonds outstanding, with semiannual interest

Answer from: Quest

hi i’m a student too and i’ve had this app downalodes for a few weeks people do answer it you just gotta be patient and what is your question + subject i’ll you?

Answer from: Quest

What are the options?

Other questions on the subject: Business

Business, 22.06.2019 10:00, annafellows

Cynthia is a hospitality worker in the lodging industry who prefers to cater to small groups of people. she might want to open a

Answers: 3

continue

Business, 22.06.2019 11:10, takaralocklear

An insurance company estimates the probability of an earthquake in the next year to be 0.0015. the average damage done to a house by an earthquake it estimates to be $90,000. if the company offers earthquake insurance for $150, what is company`s expected value of the policy? hint: think, is it profitable for the insurance company or not? will they gain (positive expected value) or lose (negative expected value)? if the expected value is negative, remember to show "-" sign. no "+" sign needed for the positive expected value

Answers: 2

continue

Business, 22.06.2019 18:50, jordendoctorwho

)a business incurs the following costs per unit: labor $125/unit, materials $45/unit, and rent $250,000/month. if the firm produces 1,000,000 units a month, calculate the following: a. total variable costs b. total fixed costs c. total costs

Answers: 1

continue

Business, 22.06.2019 19:10, ayoismeisalex

Ancho corp. is an automobile company whose core competency lies in manufacturing petrol- and diesel- based cars. the company realizes that more of its potential customers are switching to electric cars. the r& d department of the company acquires competencies in developing electric cars and launches its first hybrid car, which uses both gas and electricity. in this scenario, ancho is primarilya. leveraging new core competencies to improve current market position. b. redeploying existing core competencies to compete in future markets. c. unlearning existing core competencies to create and compete in markets of the future. d. building new core competencies to protect and extend current market position

Answers: 3

continue

You know the right answer?

Laurel, Inc., and Hardy Corp. both have 9 percent coupon bonds outstanding, with semiannual interest...