a. Suppose the US government would like to finance the building of a new hospital. To raise the required capital, US Treasury issues a coupon bond with the following properties:

- 2 year maturity

-$1,000 nominal value

- 3% coupon rate (coupon payments are made every 6 months)

If the current price of this bond is $1.025 in the bond market, what is the yield of this bond? (You can assume a risk free interest rate of 2% for discounting coupon payments and the nominal value of the bond).

b. Is the bond in this question trading at a discount, premium or at par?

c. Now increase the maturity of this bond to 5 years. What is the new yield of the bond? In comparison to the yield of the 2 year bond, does the 5 year bond have a higher or lower yield?