(a) Abdul Inc., wants to raise $1 million by issuing six-year zero coupon bonds with a face value of $1,000. Its investment banker states that investors would use an 11.4 percent discount rate to value such bonds. At what price would these bonds sell in the marketplace? How many bonds would the firm have to issue to raise $1 million? Assume semi-annual interest payments.

(b) Investor A holds a 15-year bond, while investor B has an 7-year bond. If interest rate increases by 1 percent, which investor will have the higher interest rate risk? Explain.

(c) Investor A holds a 10-year bond paying 8 percent a year, while investor B also has a 10-year bond that pays a 6 percent coupon. Which investor will have the higher interest rate risk? Explain.