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HEDGING/BONDS

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CONSIDER THREE ZERO-COUPON, $1000 FACE-VALUE BONDS. BOND A MATURES ONE YEAR FROM TODAY. BOND B MATURES FIVE YEARS FROM TODAY, AND BOND C MATURES TEN YEARS FROM TODAY. THE CURRENT MARKET INTEREST RATE IS 11 PERCENT PER ANNUM (EFFECTIVE ANNUAL YIELD).

a. What is the current price of each bond.
b. If the market interest rate suddenly rises to 14 percent per annum (effective annual yield), what will be the price of each of these bonds?
c. Which bond experienced the greatest percentage change in price?

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Current price of the bond will be the present value of the three bonds. Use the following formulas in ...

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