(1) Unlucky Louie is a cash manager who invests in relatively long-term bonds in an effort to earn extra interest on his firms working capital. Suppose that he buys a 1-year bond($10,000 zero coupon bond) when interest rates are 8 percent and that interest rates immediately rise by 1 percent. In percentage terms, how much did his investment decline in value? Round to two decimal places.

(2) Unlucky Louie is a cash manager who invests in relatively long-term bonds in an effort to earn extra interest on his firms working capital. There is a general rule in finance that when interest rates climb by 1 percent the price of zero coupon bonds falls by a percentage slightly smaller than their maturity. Verify that this is true by computing how much Unlucky would have lost as a percentage of the original purchase prices if he had bought one-half-year, 3-year, and 5-year zero coupon bonds($10,000) just before the interest rates rose from 8 percent to 9 percent. Round to two decimal places.

Unlucky would have lost = _____% for the one-half year bond

(3) Unlucky Louie has decided to try his cash management skills in other areas of investments. Louie notices that 1-year U.S. Treasury bills offer an annualized yield of 8 percent at the same time that an alternative 1-year investment offers a return of 10 percent (assume annual compounding).

By how much would $100,000 grow in 1 year if invested in the alternative that offers a 10 percent return?

Unlucky would have lost = _____% for the one-half year bond

Unlucky would have lost = ____% for the three-year bond

Unlucky would have lost = _____% for the five year bond