a) A $1,000 bond has a 7.5 percent coupon and matures after eleven years. If current interest rates are 9 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 six years interest rates are still 9 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 _____(less/higher) than the price of the bond with the shorter term as the investors will collect the _____(smaller/higher) interest payments and receive the principal within a longer period of time.

d) Change the interest rate in a and b to 7 percent and rework your answers. Assume that the bond pays interest annually. Round your answers to the nearest dollar.

Price of the bond (eleven years to maturity): $______ Price of the bond (five years to maturity): $______

Even though the interest rate is 7 percent in both calculations, why are the bond prices different?

The price of the bond with the longer term is _____ (less/higher) than the price of the bond with the shorter term as the investors will collect the _____(smaller/higher) interest payments for a longer period of time.

Interest Factors for the Present Value of One Dollar Time Period e.g year) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% 16% 18% 20% 24% 28% 1 990 980 971 962 952 943 .935 926 917 .909 893 877 870 862 847 833 806 781 2 980 961 943 925 907 890 873 857 842 826 .797 769 .756 743 718 694 650 610 3 971 942 915 889 864 840 816 .794 772 .751 .712 675 658 641 609 .579 .524 477 4 961 924 889 855 823 .792 763 735 708 683 636 .592 572 .552 516 482 423 373 5 951 906 863 822 784 747 713681 650 621 567 .519 497 476 437 402 34 291 6 942 888 838 790 .746 705 666 630 596 .564 .507 456 432 410 370 335 275 227 7 933 871 813 760 7 665 623 583 .547 513 452 400 376 354 314 279 222 178 8 .923 .853 .789 .731 .677 .627 .582 .540 .502 .467 .404 .351 .327 .305 .266 .233 .179 .139 9 914 837 766 703 645 .592 544 500 460 424 361 308 284 263 226 194 144 108 10 905 820 744 676 614 558 508 463 422 386 322 .270 247 227 191 162 116 085 11 896 804 .722 650 585 527 475 429388 350 287 237 .215 195 162 135 .094 066 12 887 788 .701 625 .557 497 444397 356 .319 257 208 187 168 137 112 076 052 13 .879 .773 .681 .601 .530 .469 .415 .368 .326 .290 .229 .182 .163 .145 .116 .093 .061 .040 14 .870 .758 .661 .577 .505 .442 .388 .340 .299 .263 .205 .160 .141 .125 .099 .078 .049 .032 15 .861 .743 .642 .555 .481 .417 .362 .315 .275 .239 .183 .140 .123 .108 .084 .065 .040 .025 16 .853 .728 .623 .534 .458 .394 .339 .292 .252 .218 .163 .123 .107 .093 .071 .054 .032 .019 17 .844 .714 .605 .513 .436 .371 .317 .270 .231 .198 .146 .108 .093 .080 .060 .045 .026 .015 18 836 700 587 494 416 350 296 250 .212 180 130 095 .081 069 051 038 .021 012 19 828 686 570 475 396 331 276 232 194 .164 116 083 .070 060 043 031 017 009 20 .820 .673 .554 .456 .377 .312 .258 .215 .178 .149 .104 .073 .061 .051 .037 .026 .014 .007 25 .780 610 478 375 295 233184 146 116 .092 059 038 030 024 016 010 005 002 30 742 .552 412 308 231 174 13 099 075 057 033 .020 .015 012 007 004 002 001