Question: 1. (a) On January 1st, 2018 UTM issues a 10 year corporate bond with a face value of $1000. The prevailing interest rate means that

1. (a) On January 1st, 2018 UTM issues a 10 year corporate bond with a face value of $1000. The prevailing interest rate means that $10 coupons are paid out monthly. Determine the present value of the bond if the risk-free rate is 2.8% (assume monthly compounding interest).

(b) Five years later on January 1st, 2023 UTSC issues a 5 year corporate bond with a face value of $800. However, interest rates have increased, so that this bond is paying monthly $12 coupons. On this date, which of the UTM and UTSC bonds has a greater value? (Assume the risk free interest rate has not changed.) (c) Generally, when interest rates (the value of the coupon) rises, what should happen to the price of any existing bond? Justify your response.

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