Problem: Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose the company's bonds have identical coupon rates of 9.125%, but that one issue matures in 1 year, one in 7 years, and the third in 15 years. Assume that a coupon payment was made yesterday.
1) If the yield to maturity for all three bonds is 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?