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John Wilson is a conservative investor who has asked your advice about two bonds he is considering. One is a 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 8%. 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 8%, so both bonds will pay the same coupon rate. Assume bond coupons are paid semiannually.

1. What is each bond worth today? Round the answers to the nearest cent. Capri Fashion Company bond: $ Gantry Elevator Company bond: $
2. If interest rates were to rise to 16% today, estimate without making any calculations what each bond would be worth. The input in the box below will not be graded, but may be reviewed and considered by your instructor.
3. If interest rates were to rise to 16% today, find what each bond would be worth to decide which bond is the better investment in this case. Do not round intermediate calculations. Round PVFA and PVF values in intermediate calculations to four decimal places. Round the answers to the nearest cent. Capri Fashion Company bond: $ Gantry Elevator Company bond: $
4. If interest rates are expected to fall, which bond is the better investment? Are long-term rates likely to fall much lower than 6%? Why or why not? (Hint: Think about the interest rate model and its components.) The input in the box below will not be graded, but may be reviewed and considered by your instructor.

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