Here are data on $1,000 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, 6 percent; GE Capital, 6.5 percent; and Morgan Stanley, 12.5 percent; where:

b. The bonds are selling for the following amounts:

Microsoft $1,047

GE Capital $1,031

Morgan Stanley $791

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 (rb) 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.

Coupon interest rate Years to maturity MICROSOFT 7.00% 24 GE CAPITAL 6.00% 16 MORGAN STANLE 6.50% 7