Consider three bonds with 5.6% coupon rates, all selling at face value. The shor
ID: 2364885 • Letter: C
Question
Consider three bonds with 5.6% coupon rates, all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has maturity 8 years, and the long-term bond has maturity 30 years. a. What will be the price of each bond if their yields increase to 6.6%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) 4 Years 8 Years 30 Years Bond price $ $ $ -------------------------------------------------------------------------------- b. What will be the price of each bond if their yields decrease to 4.6%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) 4 Years 8 Years 30 Years Bond price $ $ $Explanation / Answer
Price of 4 years bond = 56/1.066 + 56/1.066^2 + 56/1.066^3 + 1056/1.066^4 =965.82 Price of 8 year bond = 56/1.066 + 56/1.066^2 + 56/1.066^3 + ......1056/1.066^8 =939.35 Price of 30 year bond = 56/1.066 + 56/1.066^2 + 56/1.066^3 + ......1056/1.066^30 =$870.76 b. Price of 4 years bond = 56/1.046 + 56/1.046^2 + 56/1.046^3 + 1056/1.046^4 =1035.79 Price of 8 year bond = 56/1.046 + 56/1.046^2 + 56/1.046^3 +...... 1056/1.046^8 =1,065.69 Price of 30 year bond = 56/1.046 + 56/1.046^2 + 56/1.046^3 + .........1056/1.046^30 =1,160.99