You are considering purchasing a consol that promises annual payments of $4.
a. If the current interest rate is 5 percent, what is the price of the consol?
b. You are concerned that the interest rate may rise to 6 percent. Compute the percentage change in the price of the consol and the percentage change in the interest rate. Compare them.
c. Your investment horizon is one year. You purchase the consol when the interest rate is 5 percent and sell it a year later, following a rise in the interest rate to 6 percent. What is your holding period return?