Question

1.

Assume you buy a bond with the following features

Bond maturity = 4
Coupon Rate = 5%
Face Value = $1,000
Annual Coupons

When you buy the bond the market interest rate = 4.50%
Immediately after you buy the bond the interest rate changes to 6.71%
What is the "reinvestment" effect in year 3 ?

2.

      Bond E has the following features:

         Face value = $1,000,        Coupon Rate = 10%,        

Maturity = 5 years, Yearly coupons

         The market interest rate is 3.03%

If interest rate remains at 3.03% for the life of the bond (i.e., 3.03 years), what is the price of Bond E in year 1?

3.

How much would you pay today for a bond that has a face value of $1,000, and annual coupon of $99 and a maturity of 8 years? (=what is the price of the bond?)

         The annual interest rate is 4.08%?

Answer 1

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