A. What is the value of a one year, 1,000 par value bond with a ten percent semiannual coupon if its required rate of return is ten percent? What is the value of a similar ten-year bond?

B.

1) What would be the value of the ten year bond described in part A if, just after it has been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13 percent return? Is the security now a bond or premium bond?

2) What would happen to the bonds value if inflation fell and it decline to 7 percent? Would it now be a premium bond or a discount bond?

3) What would happen to the value of the ten year bond over time if the required rate of return remained at (I) 13 percent of (Ii) remained at 7 percent?