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    Interest rate risk for Philadelphia Electric bonds: YTM, fai

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    (Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose PhilEl's bonds have identical coupon rates of 9.125% but that one issue matures in 1 year, one in 7 years, and the third in 15 years. Assume that a coupon payment was made yesterday.

    a. If the yield to maturity for all three bonds is 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 fair 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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    (Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose PhilEl's bonds have identical coupon rates of 9.125% but that one issue matures in 1 year, one in 7 years, and the third in 15 years. Assume that a coupon payment was made yesterday.

    a. If the yield to maturity for all three bonds is 8%, what is the fair price of each bond?

    We need to calculate how much is the bond's price by using the formula as follows: -

    where B is the issued price/current price
    C is the coupon payment
    r is the require yield to maturity
    n is the period
    Coupon payment or C = 1,000 x 0.09125 = $91.25
    n = 1
    B = ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer what is the fair price of each bond.

    $2.19

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