Consider three bonds with 6.8% coupon rates, all making annual coupon payments a
ID: 2760150 • Letter: C
Question
Consider three bonds with 6.8% 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 7.8%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Bond price
at 4 Years = $
at 8 years = $
at 30 years = $
b. What will be the price of each bond if their yields decrease to 5.8%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Bond price
at 4 Years = $
at 8 years = $
at 30 years = $
c. Are long-term bonds more or less affected than short-term bonds by a rise in interest rates? a. More affected b. Less affected
d. Would you expect long-term bonds to be more or less affected by a fall in interest rates? a. More affected b. Less affected
Explanation / Answer
A.Coupon 68, FV 1000, Yield is 7.8%.
For N=4, Price is 966.73
For N =8, Price is 942.09
For N = 30, Price is 885.26
B.Couponis 68, FV is 1000, Yield is 5.8%
For N =4, Price 1034.81
For N =8, Price 1062.95
For N =30, Price 1140.64
C.Long term bonds aremore affected by rise in interest rates than short term bonds
D.Long term bonds aremire affected by fallininterest rates.
Longer thematurityhigher the risk and higher the sensitivity to interest rate fluctuations.