Question: 3. You are considering purchasing a five-year, 8% coupon bond with a face value of $1,000. a) Right now market interest rate is 7%. How

3. You are considering purchasing a five-year, 8% coupon bond with a face value of $1,000. a) Right now market interest rate is 7%. How much would you pay for this bond? Analysts predict that there is 50% chance for the market interest rate to fall to 6% next year and with the other 50% chance the market interest rate stay the same at 7%. b) Calculate the price of the bond next year when the interest rate remains at 7% and falls to 6%, respectively. c) Calculate the rate of return when you sell the bond at the price that you calculated in part 2).

d) Calculate the expected rate of return and the risk of the bond purchase. (Risk is measured as standard deviation of the rate of return)

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