John Wilson is a conservative investor who has asked your advice about two bonds he is considering.

Question:

John Wilson is a conservative investor who has asked your advice about two bonds he is considering. One is a seasoned issue of the Capri Fashion Company that was first sold 22 years ago at a of $1,000, with a 25-year term, paying 6%. The other is a new 30-year issue of the Gantry Elevator Company that is coming out now at a of $1,000. Interest rates are now 6%, so both bonds will pay the same rate.
a. What is each bond worth today? (No calculations should be necessary.)
b. If interest rates were to rise to 12% today, estimate without making any calculations what each bond would be worth. Review page 279 on estimating if necessary.
c. Calculate the prices in part (b) to check your estimating ability. If interest rates are expected to rise, which bond is the better investment?
d. If interest rates are expected to fall, which bond is better? Are long-term rates likely to fall much lower than 6%? Why or why not?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...