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Assume that a $1,000 par value bond with a coupon rate of 6.5% (paid semi-annually) has 15 years to maturity.
a. If the current rate of interest on bonds like this is 5%, what will be the price of the bond? What is the price if current interest rates are instead 8%?
b. Assume that you buy the bond described above when interest rates are 5%. Five years later, you decided to sell the bond when current interest rates are still 5%. At what price will the bond be selling? Do the same assuming that you buy the bond when interest rates are 6%, and five years later they are still 6%.
c. Now assume that you purchase the bond in part a above when interest rates are 5%, and five years later interest rates are 9%. What will be the price of the bond?
d. What is the current yield and capital gains yield on this bond in part a if interest rates are 5%?