Determine what is the fair price of each bond now

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ABC is also interested in buying some corporate bonds for its investment account. Suppose these bonds have identical coupon rates of 7.75% but one issue matures in 3 years, one in 8 years, and the third in 13 years. Assume that a coupon payment was made yesterday and they are all issued by the same company.

a) The yield to maturity for all three is 6.55%, what is the fair price of each bond?

b) Suppose that the yield to maturity for all of these bonds changed instantaneously to 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%. Now what is the fair price of each bond?

d) Based on the fair prices at the various yields to maturity is interest-rate risk the same, higher, or lower for longer- versus shorter-maturity bonds.

Reference no: EM13333543

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