Risk of interest rates | 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%. The price of Bond J would drop by 44.8% if the interest rate suddenly increases by 3%

For bond S, the calculation would be: P1=(14.3/9.6-1)*1000=48.4%. This means that Bond S prices will go up 48.4% if the interest rate suddenly goes up by 3%

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

The findings highlight the need for investors to consider both past and future trends when choosing investments for their portfolios. This will allow them to reduce risk, while still aiming long-term returns.