Question

Consider three bonds with 8% coupon rates, all making annual coupon payments and all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has a maturity of 8 years, and the long-term bond has a maturity of 30 years.

a. What will be the price of the 4-year bond if its yield increases to 9%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. What will be the price of the 8-year bond if its yield increases to 9%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

c. What will be the price of the 30-year bond if its yield increases to 9%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

d. What will be the price of the 4-year bond if its yield decreases to 7%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

e. What will be the price of the 8-year bond if its yield decreases to 7%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

f. What will be the price of the 30-year bond if its yield decreases to 7%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

g. Comparing your answers to parts (a), (b), and (c), are long-term bonds more or less affected than short-term bonds by a rise in interest rates?

• More affected

• Less affected

h. Comparing your answers to parts (d), (e), and (f), are long-term bonds more or less affected than short-term bonds by a decline in interest rates?

• More affected

• Less affected

Answer 1

a. What will be the price of the 4-year bond if its yield increases to 9%? = $967.60

b. What will be the price of the 8-year bond if its yield increases to 9%? $944.65

c. What will be the price of the 30-year bond if its yield increases to 9%? = $897.26

d. What will be the price of the 4-year bond if its yield decreases to 7%? $1033.87

e. What will be the price of the 8-year bond if its yield decreases to 7%? $1059.71

f. What will be the price of the 30-year bond if its yield decreases to 7%? $1124.09

g. Comparing your answers to parts (a), (b), and (c), are long-term bonds more or less affected than short-term bonds by a rise in interest rates?

• More affected

h. Comparing your answers to parts (d), (e), and (f), are long-term bonds more or less affected than short-term bonds by a decline in interest rates?

• More affected

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