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John Wilson is a conservative investor who has asked your advice about two bonds he is considering. One is seasoned issue of the Capri Fashion Company that was first sold 22 years ago at a face value of $1000, with a 25-year term, paying 6%. The other is a new 30-year issue of the Gantry Elevator Company that is coming out now at a face value of $1000. Interest rates are now 6%, so both bonds will pay the same coupon rate.
a. What is each bond worth today? (No calculations should be necessary.)b. If interest rates were to rise to 12% today, estimate without making any calculations what each bond would be worth.c. Calculate the prices in part b to check your estimating ability. If interest rates are expected to rise, which bond is the better investment?d. If interest rates are expected to fall, which bond is better? Are long-term rates likely to fall much lower than 6%? Why or why not?
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