Consider a $1,000 bond with a fixed-rate 10 percent annual coupon rate and a maturity (N) of 10 years. The bond currently is trading to a market yield to maturity (YTM) of 10 percent.

a. Complete the following table: Change N Coupon Rate $ Change in Price % Change in YTM Price from Par Price from Par 000 8 10% 9% 9 10 9 000 10 10 10 10 10 10 11 10 12 10 200 00 9 10 11 11 11

b. Use this information to verify the principles of interest rate-price relation- ships for fixed-rate financial assets. Rule1.

Interest rates and prices of fixed-rate financial assets move inversely. Rule2.

The longer is the maturity of a fixed-income financial asset, the greater is the change in price for a given change in interest rates. Rule3.

The change in value of longer-term fixed-rate financial assets increases at a decreasing rate. Rule4.

Although not mentioned in the Appendix, for a given percentage (±) change in interest rates, the increase in price for a decrease in rates is greater than the decrease in value for an increase in rates. The following questions and problems are based on material in Appendix 9B to the chapter