Question

a. Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. Using column 2, indicate what the bond price will be with a 10-year, a 15-year, and a 25-year time period.

b. Assume the interest rate in the market (yield to maturity) goes up to 12 percent for the 10 percent bonds. Using column 3, indicate what the bond price will be with a 10-year, a 15-year, and a 25-year period.

c. Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. If interest rates in the market are going down, which bond would you choose to own?

	10 Years
	15 Years
	25 Years

d. Assume the interest rate in the market (yield to maturity) goes up to 12 percent for the 10 percent bonds. If interest rates in the market are going up, which bond would you choose to own?

	10 Years
	15 Years
	25 Years

Answer 1

let us assume that the FV of the bond is $1000.

a. if the market interest rates falls from 10 to 8% the prices of the bonds will be :

the prices were for 10% interest rates :

10 year bond =$ 385.54

with 8% interest rates the price is = $463.19

similarly for the 15 year bond the price was 239.39 now when the interest rate is 8% the price is $315.24

for the 25 years bond:

the price was $92.29 and now the price of the bond is $146.02

b. now,the interest rates are increasing from 10% to 12%

the pv of the bond with a maturity of 10 years and a interest rate of 10% is

$385.54. the pice of the bond when the interest rate has increased to 12% is $321.19

similarly for the 15 year bond the pv at 10% interest rate is $239.39 and the price after the 2% increase in the interest rate is $182.69

similarly for the 25 year maturity bond, the pv was $92.29 and the price today is $58.82.

c. the bond will the longest maturity is the most affected by the changes in interest rates ,

so when there are interest rates changes, the bond with the lowest maturity will benefit the most with the fall in the interest rates. so, i will choose bond with a 10 year maturity.

d. again, if interest rates going up, the bond with the longets maturity will suffer the most.

so i will prefer owning the bond with a maturity of 10 years.