BOND VALUATION Robert Black and Carol Alvarez are vice presidents of Western Money Management and codirectors of the companys pension fund management division. A major new client, the California League of Cities, has requested that Western present an investment seminar to the mayors of the represent-ed cities. Black and Alvarez, who will make the presentation, have asked you to help them by answering the following questions:

e. Please provide your response for the following; 1. What is the value of a 13% coupon bond that is otherwise identical to the bond described in part d? Would we now have a discount or a premium bond? 2. What is the value of a 7% coupon bond with these characteristics? Would we now have a discount or premium bond? 3. What would happen to the values of the 7%, 10%, and 13% coupon bonds over time if the required return remained at 10%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N; then change (override) N to see what happens to the PV as it approaches maturity.) f. What is price risk? Which has more price risk, an annual payment 1-year bond or a 10-year bond? Why? g. What is reinvestment risk? Which has more reinvestment risk, a 1-year bond or a 10-year bond?