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.