Question: Lets consider the four bonds for which data is displayed in Table 18.1. The first is a US Treasury note and the other three are

Let’s consider the four bonds for which data is displayed in Table 18.1.

The first is a US Treasury note and the other three are corporate bonds from Berkshire Hathaway (BH), Motorola, and Delta Airlines. We will consider these four bonds at somewhat different points in time so that all of them are six years away from maturity

(a) Calculate the price of each bond assuming that you are at the dates indicated in the ‘You are’ row, and using the semiannual discount rates displayed in the ‘SADR-1’ row.

(b) Recalculate the price of each bond assuming that you are at the dates indicated in the ‘You are’ row, but now using the semiannual discount rates displayed in the ‘SADR-2’ row.

(c) How does the price of each bond react to the increase in its discount rate? Why?

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