Here are data on $1,000 par value bonds issued by Caterpillar and Intel. Assume you are thinking about buying these bonds.

CaterpillarIntelCoupon5%4%Years to Maturity810Required Return4%5%

Answer the following questions:

a) Assuming interest is paid annually, calculate the values of each of the bonds (10 points)

b) How would these values change if the coupon was paid semiannually (10 points)

c) Assume that the bonds with the coupon that is paid annually (point a) are selling for the following amounts:

Caterpillar $1,050

Intel $980

What are the expected rates of return (YTM) for each bond? (10 points)

d) How would change the price of each bond if the required rate of return (current 4% for Caterpillar and 5% for the Intel and with annual coupon) increased by 2% (10 points). What will you deduce about the relationship between market interest rate and bond prices? (5 points).