Consider the following three bonds.
Coupon Rate Face Value Time to maturity (in years) CouponPayments per year
Bond A. 0 $1000 t = 2 0
Bond B. 20% $1000 t = 2 1
Bond C 0 $1000 t = 3 0
For Bond B the first coupon is paid in exactly one year (at t = 1).
A. What are the current (t =0) prices of these bonds if the effective annual yield on all bonds in 5 percent?
Price of Bond A = ________________.
Price of Bond B = _______________.
Price of Bond C = ________________.
Please show work
B. If the yield curve shifts up to 6 percent (in the next nanosecond) what are the t = 0 prices of these three bonds.
Price of Bond A = _______________.
C. Comparing Bond A and Bond B which of these two bonds has the larger percentage change in price given the shift in the yield curve?
Bond A Bond B
Please show work.
D. What can you conclude about the amount of price risk that exists for zero- versus non-zero coupon bonds with the same maturity date?
E. Comparing Bond A and Bond C which of these two bonds has the larger percentage change in price given the shift in the yield curve?
Bond A Bond C
F. What can you conclude about the amount of price risk that exists for longer-term versus shorter-term zero-coupon bonds?
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