Question: Assume that you have a one-year investment horizon and are trying to choose among three bonds. All have the same default risk and mature in 10 years. The first is a zero-coupon bond that pays $1000 at maturity. The second has a coupon rate of 8% and makes an annual coupon payment. The third has a coupon rate of 10% and also makes an annual coupon payment.
(a) If the YTM is equal to 8% what is the current prices for all three bonds?
(b) Suppose that the YTM next year falls to 7.5%. Calculate the one year holding period return for each of the bonds.