Bonds Valuation and Duration (30 points)

Ray Co.s bonds, maturing in 3 years, pay 8 percent interest on a $1,000 face value. Interest is paid once per year. If your required rate of return is 8 percent, what is the value of the bond?.

Now assume that the required rate of return increased to 9%. Would you recommend investors to buy the bond? . What can you conclude about the relationship between bond prices and interest rates?

Assume that the modified duration of this bond is 2.60 years. If the market yield changes by 2%, how much change will there be in the bond's price in %?