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?
d. Without using a calculator, argue your way through to an answer to the following question. Suppose this had been a 5-year instead of a 3-year bond. Everything else about the bond remains the same. Would the one-period rate of return be higher or lower compared to your answer in c), if the interest rate fell to 8% next year?