Imagine that the market yield to maturity for five-year bonds in a particular risk class is 6 per cent. You buy a bond in that risk class which offers an annual coupon of 5 per cent for the five three years, with the first payment in one year. The bond will be redeemed at par (100) in five years.

(a) How much would you pay for the bond?

(b) How much would you pay for the bond if you think that the company became less risky, and its yield to maturity should be 4 percent?