Here are data on $1000 par value bonds issued by Microsoft, GE Capital, and Morgan Stanley. Assume you are thinking about buying these bonds. Answer the following questions:

a. Assuming interest is paid annually, calculate the values of the bonds if your required rates of return are as follows: Microsoft, 5 percent; GE Capital, 18 percent; and Morgan Stanley, 9 percent; where:

Morgan Stanley

	Microsoft	GE Capital
Coupon interest rate	5.25%	6.75%		8.50%
Years to maturity	32	22		17
(Click on the icon located on the top-right corner of the data table ab

b. The bonds are selling for the following amounts: Microsoft $1124 GE Capital $474 Morgan Stanley $1042 What are the expected rates of return for each bond?

c. How would the value of the bonds change if (1) your required rate of return (r Subscript b) increased 2 percentage points or (2) decreased 2 percentage points?

d. Explain the implications of your answers in part (c) in terms of interest rate risk, premium bonds, and discount bonds.

e. Should you buy the bonds? Explain.