# Determining a Bond's Price and Interest Rate Risk

Philadelphia Electric bonds trading New York Stock Exchange. Suppose PhilEl's bonds identical coupon rates 9.125% issue matures 1 year, 7 years, 15 years. Assume a coupon payment made yesterday.

A. If yield maturity of all three bonds 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 fait 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?

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#### Solution Preview

To determine the fair price of each bond, we must discount its cash flows by the yield to maturity for the maturity period. Remember that there ...

#### Solution Summary

This solution, completed on an Excel spreadsheet, shows you how to use Excel to compute a bond's price at different discount rates and maturities. It also discusses interest rate risk as a function of both yield to maturity and years to maturity.