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You buy a bond with two years to maturity, a face value of $4,000 and an annual coupon payment of $300.

You buy a bond with two years to maturity, a face value of $4,000 and an annual

coupon payment of $300.

Show your calculations

(or explain your answer in one

sentence if there are no calculations) for each question below.

a.

What is the coupon rate on the bond?

b.

How much are you willing to pay for the bond if market interest rates are 5%?

c.

After 1 year, you cash in the coupon and sell the bond. If the market interest rate

is now 3%, how much can you sell your bond for?

d.

Calculate (i) the rate of capital gains, and (ii) your total rate of return on the bond.

e.

What is the yield to maturity for the new buyer, who buys from you at the price

you found in c.?

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