1. Bond J is a 4 percent coupon bond. Bond K is a 10 percent coupon bond. Both bonds have 8 years to maturity, make semiannual payments, and have a yield to maturity of 9 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? What if rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of lower-coupon bonds?
2. You know that r1=5%, f2=6%, f3=7% (the subscript indicates the year). You also know that the price of a 4 year zero-coupon bond is $750 (face value is $1000). What is the price of a 5% annual coupon bond with 4 year maturity (assume face value of $1000)?
Note: Both problems completed done without financial calculator.