There is a coupon bond with a face value of $1000 and a coupon rate of 5%. Its yield to maturity is 2% and its maturity is five years away.
a) Calculate its price.
b) The yield to maturity is now 4%. Calculate the new price.
c) Name three things on the demand side and three things on the supply side that could have caused this change in the yield. Explain each reason briefly.
d) Assume that the change is driven by the demand side. Draw a diagram of the bond market and show how the demand curve shifts. Label the initial and new equilibria as A and B.
e) Assume that the change is driven by the supply side. Draw a diagram of the bond market and show how the supply curve shifts. Label the initial and new equilibria as A and B.
f) You purchased the bond at its original price, held it for one year, received a coupon, and sold it at the new price. What is the return you received?