4.2 You have sold bonds that promise to pay $400 in interest at the end of each year until the end of the year in which the bond matures. At that time you will also pay the $12,000 in principal.

a. If the bond has 10 more years until it matures and the discount rate is 5 percent, what is the price of the bond? Suppose that the discount rate rises to 9 percent.

Now what is the price of the bond? (Hint:

You can use Tables 16.1 and 16.3 for the discount factors and annuity factors.)

How has the rise in the discount rate affected the price of the bond?

b. Suppose that the bond has only 5 more years until it matures. If the discount rate is 5 percent, what is the price of the bond?

Suppose that the discount rate rises to 9 percent. Now what is the price of the bond? How has the rise in the discount rate affected the price of the bond?

c. Which bond price reacted more to the rise in the discount rate: the bond with the 10-year life span or the bond with the 5-year life span? Explain the difference in the responses to the change in the discount rate.