Consider a five-year, 15 percent annual coupon bond with a face value of $1,000. The bond is trading at a rate of 12 percent. (LG 3-4)

a. What is the price of the bond?

b. If the rate of interest increases 1 percent, what will be the bond’s new price?

c. Using your answers to parts

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

d. Repeat parts

(b) and

(c) assuming a 1 percent decrease in interest rates.

e. What do the differences in your answers indicate about the price–interest rate relationships of fixed-rate assets?

AppendixLO1