Bond Valuation All bonds have a $1,000 face or par value unless otherwise stated. kc is the coupon rate and kd is the market cost of debt (a.k.a. "YTM").

A) Value a bond with 10yrs to maturity. Its par value is 1000, annual coupon is 10% and the applicable interest rate is 10%. What will happen to the bond price if rates rise to 13% or go down to 7%.

B) Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, be subject to much more interest rate risk if you purchased a 30day bond than if you bought a 30-year bond.

C). True/ False Explain: If the required rate of return on a bond is lower than its coupon interest rate (and kd remains above the coupon rate), the market value of that bond will always be below its par value until the bond matures, at which time its market value will equal its par value (Accrued interest between interest payment dates should not be considered when answering this question.)

D). Value a 20yr bond with 14 years to go before maturity. Its par value is 1000, annual coupon is 7.5% and the applicable interest rate is currently 11%. What would be your total rate of return if you sold this bond in one year (1) if Interest rates remained unchanged, (2) Interest rates rose to 15%?

E) A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If your nominal annual required rate of return is 12 percent with quarterly compounding, how much should you be willing to pay for this bond?