Problem 1: Consider three bonds with 8 percent coupon rates, 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 happen to the price of each bond if their yields increase to 9 percent?
b. What will happen to the price of each bond if their yields decrease to 7 percent?
c. What do you conclude about the relationship between time to maturity and the sensitivity of bond prices to interest rates?
Problem 2: In the table below, use the MS Excel PV function to calculate bond values.
a. What will happen to the price of each bond if their yields increase to 9 percent?
b. What will happen to the price of each bond if their yields decrease to 7 percent?
Maturity of bond
Yield 4 years 8 years 30 years
7% FORMULA FORMULA FORMULA
8% FORMULA FORMULA FORMULA
9% FORMULA FORMULA FORMULA
c. What do you conclude about the relationship between time to maturity and the sensitivity of bond prices to interest rates?