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##### QP5-14 Interest Rate Risk Laurel, Inc., and Hardy...

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QP5-14 Interest Rate Risk Laurel, Inc., and Hardy Corp. both have 5.25 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has 3 years to maturity, whereas the Hardy Corp. bond has 20 years to maturity. Requirement 1: If interest rates suddenly rise by 3.75 percent, what is the percentage change in the price of these bonds? (Negative amount should be indicated by a minus sign. Input your answers as a percent rounded to 2 decimal places, without the percent sign. (e.g., 32.16)) Percentage change Laurel ____________ percent Hardy ____________ percent Requirement 2: If interest rates were to suddenly fall by 3.75 percent instead, what would the percentage change in the price of these bonds be then? (Input your answers as a percent rounded to 2 decimal places, without the percent sign. (e.g., 32.16)) Percentage change Laurel ____________ percent Hardy ____________ percent Requirement 3: What does this problem tell you about the interest rate risk of longer-term bonds? (a) The longer the maturity of a bond, the greater is its price sensitivity to changes in interest rates. (b) The longer the maturity of a bond, the lesser is its price sensitivity to changes in interest rates.

Paper#7105 | Written in 18-Jul-2015

Price : \$25