Part $1$:

The following bond quotation appears on the Wall Street

Journal.

Bond Price Quotes:

As the CFO of an organization, you are asked to answer the

following basic questions for everyone in your organization

to understand: $(5$ points each$)$

i$.$ What is the coupon rate on the bond?

ii$.$ When does the bond mature?

iii. What is the bid price?

iv$.$ What does this $($bid price$)$ mean?

v$.$ What is the ask price?

vi$.$ What does this $($ask price$)$ mean?

vii. How much did the price change from the previous

day?

viii. What is the yield based on the ask price $($this is the

same as the YTM$)?$

ix$.$ What is the Bid$-$Ask Spread?

x$.$ What does this $($bid$-$ask spread$)$ mean?

As an MBA student, you are curious about the inverse

relationship between bond prices and interest rate. More

specifically, you want to figure out how interest rate

sensitivity affects bonds of varying maturities. So$,$ you

decide to analyze two bond issues: Bond S and Bond L$.$

Both bond $S$ and Bond $L$ have $8\%$ coupons, make

semiannual payments, and are priced at par value $($meaning

their PV is $$1000).$ Bond S matures in $3$ years, whereas

Bond L matures in $20$ years. Given this information:

a$.$ If interest rates suddenly rise by $3\%,$ what is the

percentage change in the price in both bonds $S$ and

L$?(20$ points$)$

b$.$ If rates suddenly fall by $3\%$ instead, what would

the percentage change in the price of both bond $S$

and $L?(20$ points$)$

c$.$ What does this problem tell you about the interest

rate risk of long$-$term bonds? $(10$ points$)$

Part $1$:

The following bond quotation appears on the Wall Street

Journal.

Bond Price Quotes:

As the CFO of an organization, you are asked to answer the

following basic questions for everyone in your organization

to understand: $(5$ points each$)$

i$.$ What is the coupon rate on the bond?

ii$.$ When does the bond mature?

iii. What is the bid price?

iv$.$ What does this $($bid price$)$ mean?

v$.$ What is the ask price?

vi$.$ What does this $($ask price$)$ mean?

vii. How much did the price change from the previous

day?

viii. What is the yield based on the ask price $($this is the

same as the YTM$)?$

ix$.$ What is the Bid$-$Ask Spread?

x$.$ What does this $($bid$-$ask spread$)$ mean?