Question 26

llee-Brealey, Myers, and Marcus, 9e, Valuing Bonds a. What will be your cash flow in year 1? b. What will be your cash flow in year 2? c. What will be your real rate of return over the two-year period? 25. Interest Rate Risk. Consider two bonds, a 3 year bond paying an annual coupon of 5% and a 10-year bond also with an annual coupon of 5% Both currently sell at face value. Now suppose that interest rates rise to 10%. (L06-3) a. What is the new price of the 3-year bonds? b. What is the new price of the 10-year bonds? c. Do you conclude that long-term or short-term bonds are more sensive to a change in interest rates? 26 Interest Rate Risk. Suppo e interest rates increase from 8% to 9%. Which bond will suffer the greater percentage decline an proe: a 30-year bond 27. Interest Rate Risk. Look again at 28 nterest Rate Risk. Consider two 30-year maturity bonds. Bod A has a coupon rate of 47, while bond B has a coupon rate of 129 Both bonds p y paying annual coupons of 8% or a 30-year zero-coupon bond"(L00-3) the previous question. Can you explain intuitively why the zero exhibits greater interest rate risk even though it has the same maturity as the coupon bond? (L06-3) their coupons semiannually, (L06-3) A should show the yield to maturity ranging from 2% to 15% , and colunins B and C should cm pute the prices of the two brals (using Euers bond price function) at each interest rate. a Construct an Excel spreadsheet showing the prices of each of these bonds for yields to maturty ranging from 2% to 15% at t tervals of 1%. Column