Consider three bonds with 5.50% coupon rates, all making annual coupon payments and all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has a maturity of 8 years, and the long-term bond has a maturity of 30 years.
a. What will be the price of the 4-year bond if its yield increases to 6.50%?
b. What will be the price of the 8-year bond if its yield increases to 6.50%
c. What will be the price of the 30-year bond if its yield increases to 6.50%?
d. What will be the price of the 4-year bond if its yield decreases to 4.50%?
e. What will be the price of the 8-year bond if its yield decreases to 4.50%?
f. What will be the price of the 30-year bond if its yield decreases to 4.50%?
g. Comparing your answers to parts (a), (b), and (c), are long-term bonds more or less affected than short-term bonds by a rise in interest rates?
- More affected
- Less affected
h. Comparing your answers to parts (d), (e), and (f), are long-term bonds more or less affected than short-term bonds by a decline in interest rates?
- More affected
- Less affected