1. You purchase a 20-year, six-month coupon bond with a face value of $1,000 and a coupon rate of 7.5%. Nominal return to maturity is 8.5% per annum. Calculate the market price of the bond.

2. Three years later, you sell the bond to your best friend, immediately after receiving the sixth coupon payment. Your best friend's nominal return to maturity is 9% per annum. Calculate the price your best friend paid.

3. Assuming you sell the bond to your best friend as described in 2, write an equation that can be solved to find the return as the six-month compound nominal annual rate of your investment. You do NOT need to solve this equation.

Answer rating: 100% (QA)

SOLUTION To calculate the market price of the bond we can use the present value formula which discounts the future cash flows of the bond back to the ... View the full answer