Question: Here are data on $1000 par value bonds issued by Microsoft, GE Capital, and Morgan Stanley. Assume you are thinking about buying these bonds. Answer

Here are data on $1000 par value bonds issued by Microsoft, GE Capital, and Morgan Stanley. Assume you are thinking about buying these bonds. Answer the following questions:

a. Assuming interest is paid annually, calculate the values of the bonds if your required rates of return are as follows: Microsoft, 6.5 percent; GE Capital,16.5 percent; and Morgan Stanley, 10 percent; where:

MICROSOFT

GE CAPITAL

MORGAN STANLEY

Coupon interest rate

5.25%

7.25%

8.00%

Years to maturity; Microsoft 31.

GE; 26

Morgan Stanley; 17

b. The bonds are selling for the following amounts:

Microsoft $762

GE Capital $538

Morgan Stanley $938

What are the expected rates of return for each bond?

c. How would the value of the bonds change if (1) your required rate of return increased 2 percentage points or (2) decreased 2 percentage points?

d. Explain the implications of your answers in part (c) in terms of interest rate risk, premium bonds, and discount bonds.

e. Should you buy the bonds? Explain.

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