Pricing coupon bonds, bond returns: You are looking at a Treasury bond that has a coupon of 4% and makes semiannual coupon payments. It matures in 10 years.
a. What are the bond’s cash flows?
b. If the yield to maturity is 3.6% what is the interest rate per period?
c. What is the present discounted value of the coupon payments? What is the present discounted value of the principal? What is the price of the bond?
d. Is the bond currently trading at a premium or at a discount? Will the bond price rise or fall if in one year the yield to maturity is still the same?
e. You hold the bond for 6 months. What is the price of the bond if the yield to maturity in 6 months is equal to 4.2%?
f. What is the return of the bond over the 6 months?
g. What are your answers to e. and f. if the yield to maturity remains constant and in 6 months is still equal to 3.6%? What would the return of the bond be if its coupon rate was 3.6%? Explain what is going on.