Bond Valuations

The yield of the 10-year US Treasury bond is 1.20%. It is the risk-free rate. You work

for investment manager and your boss asks you to calculate the price of a 10-year

corporate bond that yields 3.00% more than its risk-free rate and has a face value of

$1,000. The fixed coupon of this corporate bond is 5.00%. Both bonds pay coupons

annually.

• What is the current price of the corporate bond?

• Calculate the price of the bond if its yield increased by 1.00%.

• Calculate the price of the bond if its yield decreased by 1.00%.

• Please discuss the risk associated with this change in interest rates?