You are considering an investment in two different bonds. One bond matures in six years

and has a face value of $1,000. The bond pays an annual coupon of 7.5% and has a 10%

yield to maturity. The other bond is a 5-year zero coupon bond with a face value of

$1,000 and has a yield to maturity of 10%.

a. What is the price of each bond?

b. What is the duration of each bond?

c. If the yield to maturity of each bond were to immediately increase to 13%, what

would be the percentage change (including the correct sign) in the price of each

bond (from the price found in part a)?

d. If the yield to maturity of each bond were to immediately decrease to 7%, what

would be the percentage change (including the correct sign) in the price of each

bond (from the price found in part a)?

e. Assume that you plan on holding the coupon bond for six years and reinvesting all

the coupons when they are received at the going interest rate (which is the yield to

maturity). Assume that after the zero matures you invest in a 1-year security that

earns the going interest rate.