4. (Interest-rate risk) The New York Stock Exchange trades many Oregon Timber bonds. With identical coupon rates of 8.075%, Oregon Timber has one issue that matures in 1 year, one in 7 years, and the third in 15 years. A coupon payment was made yesterday. (Set up a spreadsheet or a table to calculate these in an easier manner. Each question a-c below has a 1, 7 and 15 year answer.)
a. If the yield to maturity for all three bonds is 8.25%, what is the fair price of each bond?
b. Suppose that the yield to maturity for all of these bonds changed instantaneously to 7.5%. 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 9.95%. Now what is the fair price of each bond?
d. Given the fair prices at the various yields to maturity, can you assume interest-rate risk the same, higher, or lower for longer- versus shorter-maturity bonds? |