The SIG recently issued a 3 year bond with face value of $20 million at an annual coupon rate of 20% p.a. In order to borrow funds to pay the promised economic stimulus assistance to local farmers. The market interest rate in the economy is 20%

a) What will be the price of the bond, given an immediate fall in the market interest rate to 15% p.a? What is the effect on the investor?

b) What will be the price of the bond, given an immediate rise in the market interest rate to 25% p.a? What is the effect on the investor?

c) Explain the relative price movements in response to interest rate changes