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Bond valuations based on Yields

Consider three bonds with 8 percent coupon rates, all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has a maturity of 8 years, and the long-term bond has a maturity of 30 years.

a. What will happen to the price of each bond if their yields increase to 9 percent?
b. What will happen to the price of each bond if their yields decrease to 7 percent?

c. What do you conclude about the relationship between time to maturity and the sensitivity of bond prices
to interest rates?

Solution

Problem 4-21
Instructions

In the table below, use the MS Excel PV function to calculate bond values.

a. What will happen to the price of each bond if their yields increase to 9 percent?

b. What will happen to the price of each bond if their yields decrease to 7 percent?

Maturity of bond
Yield 4 years 8 years 30 years
7% FORMULA FORMULA FORMULA
8% FORMULA FORMULA FORMULA
9% FORMULA FORMULA FORMULA

c. What do you conclude about the relationship between time to maturity and the sensitivity of bond prices
to interest rates?

Solution Summary

The solution calculates the prices of bonds based on yields and interest rates.

$2.19