Philadelphia Electric has many bonds trading on the New York Stock Exchange. Sup

ID: 2662892 • Letter: P

Question

Philadelphia Electric has many bonds trading on the New York Stock

Exchange. Suppose PhilEl’s bonds have identical coupon rates of 9.125% but that one issue

matures in 1 year, one in 7 years, and the third in 15 years. Assume that a coupon payment

was made yesterday.

a. If the yield to maturity for all three bonds is 8%, what is the fair price of each bond?

b. Suppose that the yield to maturity for all of these bonds changed instantaneously to 7%.

What is the fair price of each bond now?

c. Suppose that the yield to maturity for all of these bonds changed instantaneously again,

this time to 9%. Now what is the fair 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- versus shorter-maturity bonds?

Please rate
a. 1. CALC: n = 1 x 2 = 2 r = 8% / 2 = 4% PV = ? PMT = 9.125% x 1,000 / 2 = $45.625 FV = $1,000