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You just bought a bond that will mature in 3 years. The face value of the...

You just bought a bond that will mature in 3 years. The face value of the bond is $1,000. The bond pays annual coupons at 6% coupon rate. The yield to maturity of the bond is 6%.

  1. What is the current price of the bond?
  2. What is the return on the bond if you hold it for one year (you sell it at the end of next year)? Explain.

Suddenly, the interest rates increased, so the new yield to maturity of the bond is now 8%. Assume no time has elapsed since the change in YTM from 6% to 8%, i.e. the change is instantaneous.

  1. What is the new return on the bond by holding it for one year (you sell it at the end of next year)?
  2. Compare you answers in c) and b) and explain the difference.
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