FINANCE
B16. (Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose Philadelphia Electric'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.
A. If the yield to maturity for all three bonds is 8%, what is the fair price of each bond?
B. Suppose that the yield to maturity for all these bonds changed instantaneously to 7%. What is the fair price of each bond now?
C. 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?
D. 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?
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