The par value of each of the following bonds is $1,000. The yield to maturity on Treasury securities (for all maturities) is 12 percent. All interest is paid semiannually.
U.S. Treasury bond, 10 percent coupon, 10-year maturity
U.S. Treasury bond, 10 percent coupon, 20-year maturity
U.S. Treasury bond, 5 percent coupon, 10-year maturity
U.S. Treasury bond, 5 percent coupon, 20-year maturity
U.S. Treasury zero-coupon bond, 10-year maturity U.S.
Treasury zero-coupon bond, 20-year maturity
Note: A zero-coupon bond pays no interest. Instead it sells at a discount to its par value sufficient to yield the required return.
a) Calculate the current price of each bond.
b) If the market interest rates increase to 14%, what will be the new price of each bond?
c) Which bond suffers the greatest percentage price decline? Why? Which suffers the least percentage price decline? Why?