a) A 30-year Treasury bond with a $10,000 face value and 6% coupon rate. The current price of this bond is $12,000 in April 2019. Suppose the price increases to $12,500 one year after the bond is purchased in April 2020. Compute the current yield.

b) Compute the rate of capital gain.

c) Compute the rate of return.

d) What happened to the interest rate between April 2019-2020? How do you know?

e) Now, suppose this same individual purchased a 5-year Treasury note in April 2019. Based on your answer to d), what happened to the price of this 5-year Treasury note between April 2019- 20? Did the price of this note change by more, or by less than the change in price in the 30-year bond? How do you know? Explain in some detail, citing how changes in interest rates affect the present value of assets, and why this change in interest rates affects one bond more than the other.

Answer rating: 100% (QA)

a The current yield takes into account the current market price of the bond So it is calculated by d... View the full answer