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Interest Rate Risk. Consider three bond with 8% coupon rates, all making annual coupon payments and all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has maturity 8 years, and the long-term bond has maturity 30 years.

a. What will be the price of each bond if their yields increase to 9%?

b. What will be the price of each bond if their yields decrease to 7%?

c. Are long-term bonds more or less affected than short-term bonds by a rise in interest rates?

d. Would you expect long-term bonds to be more or less affected by a "fall" in interest rates?

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Financial Management, Finance

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