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4 Interest Rate Risk and Bond Returns (20pts.) There are six coupon bonds that have the same coupon rate of 10%, the face value of $1000, and initial price (which is your purchasing price today) of $1,000. All pay coupons annually. However, their maturity is different: 1, 2, 5, 10, 20 and 30 years. 1. (15pts) When interest rates rise from 10% to 30% in the next year, then fill out the blanks in the following table. Rate of gain Rate of return Maturity Initial yield Initial price Price next year 30 10 $1,000 20 10 $1,000 10 10 $1,000 5 10 $1,000 2 10 $1,000 1 10 $1,000 2. (5pts) When interest rates rise from 10% to 20% after 5 years, then fill out the blanks in the following table. (Note that you should calculate the bond price next year in the table below.) Rate of gain Rate of return Maturity 30 20 10 Initial yield Initial price Price next year 10 $1,000 10 $1,000 10 $1,000 10 $1,000 10 $1,000 10 $1,000 5 2 1 4 Interest Rate Risk and Bond Returns (20pts.) There are six coupon bonds that have the same coupon rate of 10%, the face value of $1000, and initial price (which is your purchasing price today) of $1,000. All pay coupons annually. However, their maturity is different: 1, 2, 5, 10, 20 and 30 years. 1. (15pts) When interest rates rise from 10% to 30% in the next year, then fill out the blanks in the following table. Rate of gain Rate of return Maturity Initial yield Initial price Price next year 30 10 $1,000 20 10 $1,000 10 10 $1,000 5 10 $1,000 2 10 $1,000 1 10 $1,000 2. (5pts) When interest rates rise from 10% to 20% after 5 years, then fill out the blanks in the following table. (Note that you should calculate the bond price next year in the table below.) Rate of gain Rate of return Maturity 30 20 10 Initial yield Initial price Price next year 10 $1,000 10 $1,000 10 $1,000 10 $1,000 10 $1,000 10 $1,000 5 2 1