Question: 2. Consider a two-year debt instrument with a face value of $5,000 and an annual coupon payment of $125. Suppose prevailing interest rates in the

2. Consider a two-year debt instrument with a face value of

2. Consider a two-year debt instrument with a face value of $5,000 and an annual coupon payment of $125. Suppose prevailing interest rates in the economy are 4.0%. a. Calculate the predicted price of this instrument. Does it sell for more (a premium) or less (a discount) than $5,000 ? b. Calculate the nominal yield of this bond. How does it compare to the prevailing market interest rate of 4.0% ? How does this comparison relate to whether the bond is sold at a premium or discount? c. Redo parts ab if interest rates are 1.0%

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