Philadelphia Electric

Philadelphia Electric - Interest-rate risk) Philadelphia...

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Unformatted text preview: Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose Philadelphia Electric s bonds have identical coupon rates of 9.125% but that one issue matures in 1 year, one in 7 years, and the third in 15 years. Assume that a coupon payment was made yesterday. a. If the yield to maturity for all three bonds is 8%, what is the fair price of each bond? CALC: n = 1 x 2 = 2 r = 8% / 2 = 4% PV = ? PMT = 9.125% x 1,000 / 2 = $45.625 FV = $1,000 PV = -$1,010.61 CALC: n = 7 x 2 = 14 r = 8% / 2 = 4% PV = ? PMT = 9.125% x 1,000 / 2 = $45.625 FV = $1,000 PV = -$1,059.42 CALC: n = 15 x 2 = 30 r = 8% / 2 = 4% PV = ? PMT = 9.125% x 1,000 / 2 = $45.625 FV = $1,000 PV = -$1,097.27 b. Suppose that the yield to maturity for all of these bonds changed instantaneously to b....
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Philadelphia Electric - Interest-rate risk) Philadelphia...

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