Interest Rate Risk

Consider three bonds with 11.98% coupon rates, 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 13.2%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	4 Years	8 Years	30 Years
Bond price	$	$	$

b.	What will be the price of each bond if their yields decrease to 10.2%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	4 Years	8 Years	30 Years
Bond price	$	$	$

c. Which bond is most sensitive to changes in the interest rates?

	4 Year		30 Year
	8 Year		They are all the same

d. When interest rates rise then the price of the bond will:

	Rise
	Fall

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

	More affected
	Less affected

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

	More affected
	Less affected