Great Deals LLC appointed you as a financial analyst, and provided you the following information about three bonds:

Bonds

A

B

C

Term to maturity (years)

10

15

15

Annual coupon rate

5%

5%

10%

Frequency of coupons

Semi annual

Semi annual

Semi annual

Face value

$1,000

$1,000

$1,000

YTM

old

8%

8%

8%

new

18%

18%

18%

(a)Estimate the value of Bonds A, B and C, based on the old YTM of 8%. [3 marks]

(b)If the interest rates increase from 8% to 18% for Bonds A and B, what can you observe on the relationship between the term to maturity and price risk? Show your workings.

(c)If the interest rates increase from 8% to 18% for Bonds B and C, what can you observe on the relationship between the coupon rate and price risk? Show your workings.

(d)Out of the three bonds, which one would you recommend if you want to increase the chance of an appreciation in the value of the bond?Explain your answer.