. 2.

Interest rates Interest rates and bond prices

Answer: e Answer: d

First, both bonds will decrease in price. Longer-maturity, lowercoupon bonds have greater price changes with rate movements than shorter-maturity, higher-coupon bonds. So statement d must be correct. 3. Price risk Answer: a

Statement a is correct. The longer the maturity and the lower the coupon of a bond, the more sensitive it is to interest rate (price) risk. The bond in answer a has a maturity greater than or equal to and a coupon less than or equal to all the other bonds. 4. This is a straight-forward bond valuation, just remember that the bond has semiannual coupons. Enter the following data into your financial calculator or go to function use PV N = 12 2 = 24; I = 8 2 = 4; PMT = 90 2 = 45; FV = 1000; and then solve for PV. Ans will be $1,076.23.

If you do an IRR then it would be 0 -1000

1 45 2 45 . . . . . . 24 1045 Calculate IRR you will get 4.5% . Now use goal seek to set the IRR to 4% and find price at Year 0. You will get the answer as 1076.23