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    Bond valuations based on Yields

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    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?

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    https://brainmass.com/business/annuity/bond-valuations-based-on-yields-114059

    Solution Summary

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

    $2.19

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