Reference no: EM132647222

Question a: If Annie strongly believes that expected inflation will rise by 1.0% during the next few months, what is the most she should pay for the bond, assuming annual interest?

Question b: If the Atilier bonds are downrated by Moody's from Aa to A, and if such a rating change will result in an increase in the required return from 8.0% to 8.75%, what impact will this have on the bond value, assuming annual interest?

Question c: If Annie buys the bond today at its $1,000 par value and holds it for exactly 3 years, at which time the required return is 7.0%, how much of a gain or loss will she experience in the value of the bond? (ignoring interest already received and assuming annual interest)?

Question d: Rework part ?(c?), assuming that Annie holds the bond for 10 years and sells it when the required return is 7.0%. Compare your finding to that in part ?(c?), and comment on the? bond's maturity risk.