Question 3:

Great Deals LLC appointed you as a financial analyst, and provided you the following information about three bonds:

Bonds	A	B	C
Term to maturity (years)	20	25	25
Annual coupon rate	7%	5%	10%
Frequency of coupons	Semi annual	Semi annual	Semi annual
Face value	$1,000	$1,000	$1,000
YTM
old	7%	7%	7%
new	15%	15%	15%

(a) Estimate the value of Bonds A, B and C, based on the old YTM of 7%. [3 marks]

(b) If the interest rates increase from 7% to 15% for Bonds A and B, what can you observe on the relationship between the term to maturity and price risk? Show your workings. [3 marks]

(c) If the interest rates increase from 7% to 15% for Bonds B and C, what can you observe on the relationship between the coupon rate and price risk? Show your workings. [3 marks]

(d) Out of the three bonds, which one would you recommend if you want to reduce the chance of a depreciation in the value of the bond? Explain your answer. [1mark]