Final answer:
When interest rates rise, the value of existing bonds typically decreases. To calculate what you would be willing to pay for a bond, you can use the present value formula.
Step-by-step explanation:
a. When interest rates rise, the value of existing bonds typically decreases. This is because investors can now earn higher interest rates elsewhere, so they are less willing to pay a higher price for a bond with a lower interest rate.
b. To calculate what you would be willing to pay for the bond, you can use the present value formula. In this case, we need to calculate the present value of the remaining cash flows (interest payments and principal repayment) using the new discount rate of 9%.
The formula to calculate the present value of a bond is:
PV = C/(1+r)^n + C/(1+r)^(n-1) + ... + C/(1+r) + M/(1+r)^n
Where PV is the present value, C is the cash flow, r is the discount rate, n is the number of periods, and M is the maturity value.