1. You buy a 3-year, 10% coupon bond with face value $1000 today. The market interest rate currently is 10% also.
a. What is the market price of the bond today?
b. You hold the bond for a year and sell it off a year later when the interest rate is 8%. What is the market price of the bond a year later?
c. What is your one period rate of return on the bond?
2. You buy a 3-year, 10% coupon bond with face value $1000 today. The market interest rate currently is 10% also.
a. You hold the bond for a year and sell it off a year later when the interest rate is 12%. What is the market price of the bond a year later?
b. What is your one period rate of return on the bond?
3. You buy a 5-year, 10% coupon bond with face value $1000 today. The market interest rate currently is 10% also.
a. What is the market price of the bond today?
b. You hold the bond for a year and sell it off a year later when the interest rate is 8%. What is the market price of the bond a year later?
c. What is your one period rate of return on the bond?
d. Suppose the interest rate next year is 12%. What are the market price and one period rate of return next year? e. Comment on the differences in your answers for 1c, 2c, 3c, 3d.