Philadelphia Electric has many bonds trading on the New YorkStock Exchange. Supp
ID: 2661886 • Letter: P
Question
Philadelphia Electric has many bonds trading on the New YorkStock Exchange. Suppose PhilEl’s bonds have identical couponrates of 9.125% but that one issue matures in 1 year, one in 7years, and the third in 15 years. Assume that a coupon payment wasmade yesterday.
a. If the yield to maturity for all three bonds is 8%, what isthe fair price of each bond?
b. Suppose that the yield to maturity for all of these bondschanged instantaneously to 7%. What is the fair price of each bondnow?
c. Suppose that the yield to maturity for all of these bondschanged instantaneously again, this time to 9%. Now what is thefair price of each bond?
d. Based on the fair prices at the various yields to maturity,is interest-rate risk the same, higher, or lower for longer- versusshorter-maturity bonds?
Explanation / Answer
x.