Question: Mr. Brown wants to purchase one of three bonds:
a) 10-year corporate bond with a 2.00% coupon, paying annually, and par value of $1,000.
b) 7-year corporate bond with a 1.75% coupon, paying annually and par value of $1,000.
c) 5-year corporate bond with a 1.50% coupon, paying annually and par value of $1,000.
1. What are the current prices for each of these bonds?
2. How will the value of these bonds change if the respective market rates increase by 50 basis points?
3. How will the value of these bonds change if their respective market rates decrease by 50 basis points?
4. What recommendation would you make about purchasing one of these three bonds?
5. Would you suggest any further analysis that might include the use of a relative interest rate risk measure used for bonds?