Northern Electric has many bonds trading on the NY Stock Exchange.
Suppose NEs bonds have identical coupon rates of 8% but that one issue matures in one year, one in 5 years and the third in 10 years. Assume that a coupon payment was made yesterday.
1) If the yield to maturity for all three bonds is 9%, what is the fair price of each bond?
2) Suppose that the yield to maturity for all these bonds changes 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 10%. 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?