Here are data on $1,000 par value bonds issued by Microsoft, GE Capital, and Morgan Stanley at the end of 2008. Assume you are thinking about buying these bonds as of January 2013. Also, assume semi-annual interest payments. Answer the following questions:

a. Calculate the values of the bonds as of 1/1/2013 if your required rates of return are as follows:

Microsoft, 6.00%

GE Capital, 8.00%

Morgan Stanley, 10.00%;

Where:

Information as of 12/31/2008

Microsoft

GE Capital

Morgan Stanley

Coupon Interest Rate

5.25%

4.25%

4.75%

Years to Maturity

30

10

5

b. At the end of 2008, the bonds were selling for the following amounts:

Microsoft$1,100

GE Capital $1,030

Morgan Stanley $1,015

What were the expected rates of return for each bond?

c. How would the value of the bonds change as of 1/1/2013 if:

(1) Your required rate of return (r_b) from part a) increased 2 percentage points or

(2) Decreased 2 percentage points?

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

e. Should you buy the bonds? Explain.