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?© BrainMass Inc. brainmass.com June 3, 2020, 10:45 pm ad1c9bdddf
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 ...
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.