Consider a three-year bond with face value F-1000 and a coupon rate c= 10% paid semi-annually. Suppose the bond is traded at a price Be = 1025. Answer the following questions:
(a) What is the current yield on this bond?
(b) What is the capital gain on this bond if the investor decided to hold the bond till maturity?
(c) What is the rate of return on this bond?
(d) Define what it means by yield to maturity and explain why it is better than the conventional rate of return.
(e) Compute the six-month (per-period) yield to maturity on this bond. You can use the approximation formula or the trial and error method in your computation.
(f) Compute the annual yield to maturity on this bond taking into account compound interest.
(g) Suppose you bought that bond from this investor at the end of year 2. How much would you pay for that bond if the market interest rate is 5%?
