Fidelity is a great financial information source. Please go to Fidelitys website.

Click on the Investment Products on the upper-right corner and select Fixed Income & Bonds from the menu.

You will see a new page with alternative fixed-income investments. Please select Individual Bonds. The new page will give you information on many important aspects of individual bonds including types, reasons to consider them, as well as product resources. Please bookmark this page as it is an important source for bond investment and learning about individual bonds.

In the product resources section, please click on Fixed Income Tools & Services, and then, Price/Yield Calculator.

Please follow the steps listed: Set CALCULATE: Price, BOND TYPE: Corporate, YIELD-TO-MATURITY: 5 percent, ANNUAL COUPON RATE: 5 percent, COUPON FREQUENCY: Annual, MATURITY DATE: Todays Date with the year set to 4 years from now. (i.e. If today is July 21, 2019, then it should be July 21, 2023), PAR VALUE: $1000.00, QUANTITY: 1, SETTLEMENT DATE: Today's date (i.e. July 21, 2019). [Note that the bonds are quoted out of $100. So, $102.44 means $1024.40 for a $1000 face value. Similarly, $98.345 means $983.45]

1. Click Calculate and see the graph and other information on the right of the calculator. Briefly explain the meaning of "Invoice Price", "Accrued Interest", "Purchase Price", "Yield-to-Maturity". Do we have a discount, premium, or par bond here? Why? Are the purchase price and the invoice price the same here? Why?

2. Compute the price of this same bond using our formula from the textbook. (Formula that computes the present value of future cash flows of the bond, using the yield-to-maturity as the discount rate? Did you find the same price as Fidelitys calculator? Please write down the formula and the result you obtained and explain briefly.

3. Now change the settlement date to tomorrow. (implies that the transaction takes place tomorrow.) Explain what happened to the Purchase Price, Invoice Price, and Accrued Interest. How is the accrued interest is calculated? Why do we have the same purchase price but a different invoice price?

4. Now go back to the calculator and change the yield-to-maturity (YTM) to 6 percent and note the new information (Settlement date is today). Do we have a discount, premium, or par bond here? Why?

5. Change the YTM to 4 percent. Do we have a discount, premium, or par bond here? Why?

6. Compare the difference in prices of the bond with YTM 4% and 6%. Are they symmetric around $1000? Explain.

7. Just change the COUPON FREQUENCY to Semi-Annual and check the new price. Why is it different?

Compute the same using an appropriate formula from the textbook? (make sure to show the interest rates you inserted clearly)

8. In the light of the above exercise, can we say bond prices are equally sensitive to the same percentage increases or decreases of the market interest rate (YTM)? Explain. (i.e. Market interest rate increases, say, from 5% to 6% and decreases from 5% to 4%)

9. In the light of what we learned in this activity, please explain the impact of coupon amounts (say $30 coupon vs. $$85 coupon) on the interest rate sensitivity of a bond. In other words, if the market interest rate changes, which bond's price will change more, the one with the low or high coupon? (assuming other things are identical.) Briefly explain why?

10. In the light of the above exercise, what is the relationship between the time to maturity and interest rate sensitivity of bonds, other things held constant?