Consider three bonds with 8% 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 9%?
B. What will be the price of the 8-year bond if its yield increases to 9%?
C. What will be the price of the 30-year bond if its yield increases to 9%?
D. What will be the price of the 4-year bond if its yield decreases to 7%?
E. What will be the price of the 8-year bond if its yield decreases to 7%?
F. What will be the price of the 30-year bond if its yield decreases to 7%?
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?
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?