1.Consider a five-year, 15 per cent annual coupon bond with a face value of $1000. The bond is trading at a yield to maturity of 12 per cent.

What is the price of the bond?

If the yield to maturity increases 1 per cent, what will be the bond’s new price?

Using your answers to parts

(a) and (b), what is the percentage change in the bond’s price as a result of the 1 per cent increase in interest rates?

Repeat parts

(b) and

(c) assuming a 1 per cent decrease in interest rates.

What do the differences in your answers indicate about the rate–price relationships of fixed-rate assets? LO 6.4