Last year a firm issued 20-year, 8% annual coupon bonds at a par value of

$1,000.

a. Suppose that one year later the going market interest rate drops to 6%. What is the new price of the bonds assuming they now have 19 years to maturity?

b. Suppose that one year after issue, the going market interest rate is 10%

(rather than 6%). What would the price have been? ($832.70)

AppendixLO1