5. Calculating the bond price

MillTower Corporation raises funds to build windpumps by issuing 3-year bonds with a coupon rate of 6% and a face value of $1,500. Assume that the market interest rate for a 3-year bond issued by a firm like MillTower is currently the same as the coupon rate. The price of each of these bonds is , which means that the bonds sell at .

Suppose that the market interest rate for bonds that are similar to the MillTower bond has increased to 7%. The price of the MillTower bond changes to , which means that it sells at .

Suppose that instead of rising, the market rate decreases from 6% to 1%. The new price of the bond changes to , which means that the bond sells at .