Problem: You are considering the purchase of a Treasury bond in the secondary market. Bonds with five years to maturity, paying a half-yearly coupon of 12 per cent per annum, are currently yielding 10 per cent per annum. You wish to purchase a bond with a face value, at maturity, of $1000.
Q1. What price should you pay fro the bond today? (Assume previous coupon has been paid today to the present holder of the bond.)
Q2: What will happen to the price of the coupon today if the current yield immediatly falls to 9 per cent per annum? Show calculations.