a. A $1,000 bond has a 6.5 percent coupon and matures after nine years. If current interest rates are 10 percent, what should be the price of the bond? Assume that the bond pays interest annually. Use Appendix B and Appendix D to answer the question. Round your answer to the nearest dollar. $ b. If after four years interest rates are still 10 percent, what should be the price of the bond? Use Appendix B and Appendix D to answer the question. Assume that the bond pays interest annually. Round your answer to the nearest dollar. $ c. Even though interest rates did not change in a and b, why did the price of the bond change? The price of the bond with the longer term is -Select- v than the price of the bond with the shorter term as the investors will collect the -Select- vinterest payments and receive the principal within a longer period of time. d. Change the interest rate in a and b to 4 percent and rework your answers. Assume that the bond pays interest annually. Round your answers to the nearest dollar. Price of the bond (nine years to maturity): $ Price of the bond (five years to maturity): $ Even though the interest rate is 4 percent in both calculations, why are the bond prices different? The price of the bond with the longer term is - Select than the price of the bond with the shorter term as the investors will collect the -Select- of time interest payments for a longer period Interest Factors for the Present Value of an Annuity of One Dollar Time Period (e.g. year) 1 2 3 4 5 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 16% 18% 20% 24% 28% 32% 36% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.893 0.877 0.862 0.847 0.833 0.806 0.781 0.758 0.735 1970 1.942 1913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.690 1.647 1.605 1.566 1.528 1.457 1.392 1.332 1.276 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.402 2.322 2.246 2.174 2.106 1.981 1.868 1.766 1.674 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.037 2.914 2.798 2.690 2.589 2.404 2.241 2.096 1.966 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.605 3.433 3.274 3.127 2.991 2.745 2.532 2.345 2.181 6 7 8 9 10 5.795 5.601 5.417 5.242 5.076 4.917 4.766 4.623 4.486 4.355 4.111 3.889 3.685 3.498 3.326 3.020 2.759 2.534 2.399 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.564 4.288 4.039 3.812 3.605 3.242 2.937 2.678 2.455 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 4.968 4.639 4.344 4.078 3.837 3.421 3.076 2.786 2.540 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.985 5.759 5.328 4.946 4.607 4.303 4.031 3.566 3.184 2.868 2.603 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 5.650 5.216 4.833 4.494 4.193 3.682 3.269 2.930 2.650 11 12 13 14 15 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 5.988 5.453 5.029 4.656 4.327 3.776 3.335 2.978 2.683 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 6.194 5.660 5.197 4.793 4.439 3.851 3.387 3.013 2.708 12.134 11.348 10.635 9.986 9.394 8.534 8.358 7.904 7.487 7.103 6.424 5.842 5.342 4.910 4.533 3.912 3.427 3.040 2.727 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 6.628 6.002 5.468 5.008 4.611 3.962 3.459 3.061 2.740 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.060 7.606 6.811 6.142 5.575 5.092 4.675 4.001 3.483 3.076 2.750 16 17 18 19 20 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.312 7.824 6.974 6.265 5.669 5.162 4.730 4.003 3.503 3.088 2.758 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.002 7.120 6.373 5.749 5.222 4.775 4.059 3.518 3.097 2.763 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 7.250 6.467 5.818 5.273 4.812 4.080 3.529 3.104 2.767 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 7.366 6.550 5.877 5.316 4.844 4.097 3.539 3.109 2.770 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.128 8.514 7.469 6.623 5.929 5.353 4.870 4.110 3.546 3.113 2.772 25 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.823 9.077 7.843 6.873 6.097 5.467 4.948 4.147 3.564 3.122 2.776 30 25.808 22.937 19.600 17.292 15.373 13.765 12.409 11.258 10.274 9.427 8.055 7.003 6.177 5.517 4.979 4.160 3.569 3.124 2.778 Interest Factors for the Present Value of One Dollar 2% 6% Time Period (e.g. year) 1 2 3 4 5 980 1% 990 980 971 961 961 .942 1924 .906 3% 971 .943 .915 .889 .863 4% 962 925 .889 .855 .822 5% 952 907 .864 .823 .784 943 .890 .840 .792 .747 7% .935 .873 .816 .763 .713 8% .926 .857 .794 .735 9% 917 .842 .772 .708 .650 10% .909 .826 .751 .683 .621 12% .893 .797 .712 .636 .567 14% .877 .769 .675 .592 519 15% .870 ,756 .658 .572 497 16% 862 .743 .641 .552 .476 18% .847 .718 .609 .516 437 20% .833 .694 579 482 .402 24% .806 .650 .524 423 .341 28% .781 .610 .477 .373 .291 .951 .681 .705 .665 .456 400 6 7 8 9 10 942 933 .923 914 .905 .888 .871 .853 .837 .820 .838 .813 .789 .766 .744 .790 .760 .731 .703 .676 .746 .711 .677 .645 .614 .627 .666 630 .623 .583 .582 .540 544 .500 .508 .463 1596 .547 .502 460 .422 564 .513 .467 424 .386 .507 452 .404 361 .322 .351 432 .376 .327 284 .247 .410 .354 .305 .263 .227 370 314 .266 .226 .191 .335 .279 .233 .194 .162 .275 222 .179 .144 .116 .227 .178 .139 . 108 .085 .592 .558 .308 .270 11 12 13 14 15 .896 .887 .879 .870 .861 .804 .788 .773 .758 .743 722 .701 .681 .661 .642 .650 .625 .601 577 555 585 557 .530 505 ,481 .527 497 .469 442 .417 .475 .444 .415 388 362 .429 .397 .368 340 315 388 .356 .326 .299 .275 350 319 .290 263 .239 .287 .257 .229 205 .183 .237 .208 .182 .160 .140 .215 .187 .163 .141 .123 .195 .168 .145 .125 .108 .162 137 .116 .099 .084 .135 .112 .093 078 .065 .094 .076 .061 .049 .066 .052 .040 .032 .025 .040 16 17 18 19 20 .853 .844 .836 .828 .820 .728 .714 .700 .686 .673 .623 .605 .587 .570 .554 .534 .513 .494 ,475 .456 .458 436 416 .396 377 .394 .371 .350 .331 .312 .339 .317 .296 .276 .258 .292 270 .250 232 .215 .252 .231 .212 .194 .178 .218 .198 .180 .164 .149 .163 .146 .130 .116 .104 .123 . 108 .095 .083 .073 .107 .093 .081 .070 .061 .093 .080 .069 ,060 .051 .071 060 .051 .043 .037 .054 .045 .038 031 .026 .032 .026 .021 .017 .014 .019 .015 .012 .009 .007 25 .780 .610 .478 .375 .295 .233 .184 .146 .116 .092 .059 .038 .030 .024 ,016 .010 .005 .002 30 .742 .552 .412 308 .231 .174 .131 .099 .075 .057 .033 .020 .015 .012 .007 .004 .002 .001