Question

Consider a 3-year bond that pays a coupon of $500 at the end of each year....

Consider a 3-year bond that pays a coupon of $500 at the end of each year. The principal of the bond is $10,000.

(a) What is the coupon rate for this bond?

(b) If the market interest rate that prevails when the bond is initially issued is 2 percent per annum, what will be the price (presentvalue) of the bond?

(c) Suppose that the maturity date on the bond was 300 years. If the market interest rate is 2 percent per annum, what is the (approximate) price of the bond?

(d) What lesson can we draw from (b) and (c) about the relative sensitivity of bond prices to changes in interest rates?

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