Questions:

The interest rate and bond price calculator provided by FinanCenter allows you to compute the effect of alternative interest rates on bond prices.

1. Use this calculator to determine the current value of a bond with a face value of $1,000, a coupon rate of 10% and a two-year maturity when the interest rate is 10%. (Assume that you paid the face value for this bond).
2. Repeat step (a), but change the market interest rate to 5%. What happens to the value of this bond? Based on the discussion in your text, explain this result.