Consider three bonds with 5.3% coupon rates, all making annual coupon payments a
ID: 2743656 • Letter: C
Question
Consider three bonds with 5.3% coupon rates, all making annual coupon payments and all selling at a face value of $1,000. 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 6.3%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Bond Price: at 4 years? 8years? 30years? b. What will be the price of each bond if their yields decrease to 4.3%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Bond Price at 4years? 8Years? 30 Years? c. Are long-term bonds more or less affected than short-term bonds by a rise in interest rates? More affected or less affected? d. Would you expect long-term bonds to be more or less affected by a fall in interest rates? More affected or less affected?
Explanation / Answer
All Amounts in $ a. Price of Bonds if yield increases to 6.3% 4 year bonds $ 965.586 8 year bonds $ 938.633 30 year bonds $ 866.66 b. Price of Bonds if yield decreases to 4.3% 4 year bonds $ 1,036.044 8 year bonds $ 1,066.501 30 year bonds $ 1,166.792 c. Long Term Bonds are more affected than Short Term Bonds by a rise in interest rates. d. Long Term Bonds are more affected by a fall in interest rates also.