Problem
You purchased a 7-year bond that pays a 3.25% coupon annually (use a par value of $1,000). The market interest rate is now 4.25%:
1. What is the annual dollar amount of interest that you will receive from your bond investment?
2. What is the price of your bond today (remember that the $1,000 is received at maturity along with the final coupon)? (Hint: use the NPV function)
3. Explain what happens to bond prices when interest rates rise.