Consider the following four bonds:
i. 5 years to maturity, 0% coupon
ii. 20 years to maturity, 0% coupon
iii. 5 years to maturity, 5% coupon
iv. 20 years to maturity, 5% coupon
A. Assuming the term structure is flat at 5%, compute the price of each bond i. to iv.
B. What is the current yield for each bond from Part A?
C. Compute the new price and the percentage price change for each bond if the term structure instantaneously shifts from 5% to 5.5%.
D. Compute the new price and the percentage price change for each bond if the term structure instantaneously shifts from 5% to 4.5%.
E. How does the bond coupon rate relate to the magnitude of the percentage price change in C. and D.?
F. How does the term-to-maturity relate to the magnitude of the percentage price change in C. and D.?
G. Are the magnitudes of the percentage price changes in C. and D. different for each bond? If so, what contributed to that difference?