Consider three bonds with 8% coupon rates, all making annual coupon payments and 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 9%?
b. What will be the price of each bond if their yields decrease to 7%?
c. Are long-term bonds more or less affected than short-term bonds by a rise in interest rates?
d. Would you expect long-term bonds to be more or less affected by a fall in interest rates?