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Question 3 (20 points)

3.a) What is the price of each of the following bonds ($1,000 principal) if the current interest rate is 8 percent? (4 points)

Firm A: coupon 4.5%, Maturity 5 years

Firm B: coupon 4.5%, Maturity 10 years

Firm C: coupon 12%, Maturity 5 years

Firm D: coupon 12%, Maturity 10 years

Firm E: coupon 0%, Maturity 5 years

Firm F: coupon 0%, Maturity 10 years

b) What is the duration of each bond? (8 points)

c) Rank the bonds in terms of price fluctuations with the least volatile bond first and the most volatile bond last as judged by each bonds duration (2 points)

d) Confirm your volatility ranking by determining the percentage change in the price of each bond if interest rates rise up to 14%. (4 points)

e) What generalizations can be made from the above exercise (2 Points)