Suppose you are considering a purchase of a new car. You have figured out that your budget allows for a monthly payment of 375 for the next three and a half years. And you think that you should be able to get a loan at 5.2% APR. Assuming that you will not have any additional money for the purchase beyond the borrowed amount and that taxes and fees associated with the purchase add up to around $680, what is the maximum price you can consider? If at the time of obtaining a loan you are able to get a better APR, say 4.2%, does that substantially alter the prices of cars you can consider?

4. Consider two 10-year bonds: one carries 5% coupon rate, the other is a pure discount bond. Both have have the same standard face value of $1,000. Explain which bond has greater interest rate risk. Illustrate your explanation with a numerical example.