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Mini Case

This Mini Case is available in MyFinanceLab.

Here are data on $1,000 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 percent; GE Capital, 8 percent; and Morgan Stanley, 10 percent; where

b. Assume that the bonds are selling for the following amounts:

Microsoft                            $1,100

GE Capital                            $1,030

Morgan Stanley                $1,015

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 (r_b) increased 2 percentage points or (2) decreased 2 percentage points?

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

e. Should you buy the bonds? Explain.