Response: We Use a Present Value Table to Look

Response: We use a present value table to look up the value of the $1000 principal to be paid 8 years or 16 semi-annual periods. Looking at the 3% row (rate per semi-annual period) , we find the factor of .623. Multiplying by $1000, the investor is selling the value of the principal for $623.00. Using a present value of an annuity table, we also look up R=3% and N=16 to find the factor 12.561. Multiplying 12.561 times the $40 semi-annual coupon, we find our investor is selling the remaining stream of 16 coupon payments for $502.44. Thus the price of the bond is $623.00 + $502.44 = $1,125.44. But the bond originally cost our investor $1,000, so the capital gain is 125.44 (using financial calculator, the answer is $125.61) . Section: Measuring Bond Yields.
-Which of the following bonds will be most sensitive to changes in market interest rates?

A) 8 percent semiannual coupon with 8 years to maturity.
B) 6 percent semiannual coupon with 8 years to maturity.
C) 8 percent semiannual coupon with 6 years to maturity.
D) 6 percent semiannual coupon with 6 years to maturity.