Problem: 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.
1. If yield maturity of all three bonds 8%, what is the fair price of each bond?
2. Suppose that the yield to maturity for all of these bonds changed instantaneously to 7%. What is the fair price of each bond now?
3. 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?
4. 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?