Problem
1. Ray Co.'s bonds, maturing in 3 years, pay 8 percent interest on a $1,000 face value. Interest is paid once per year. If your required rate of return is 8 percent, what is the value of the bond?
2. Now assume that the required rate of return increased to 9%. Would you recommend investors to buy the bond?
3. What can you conclude about the relationship between bond prices and interest rates?
4. Assume that the modified duration of this bond is 2.60 years. If the market yield changes by 2%, how much change will there be in the bond's price in %?