Question: Consider a three-year bond with face value F = 1000 and coupon rate c = 10% paid quarterly. Suppose the bond price is traded at

Consider a three-year bond with face value F = 1000 and coupon rate c = 10% paid quarterly. Suppose the bond price is traded at a price of Bo = 1025. 

Answer the following questions:

a. What is the current yield on this bond?

b. What is the capital gain on this bond if held till maturity?

c. What is the rate of return on this bond?

d. Define what it means by yield to maturity and explain why it is better than the conventional rate of return.

e. Compute both the per-period and annual yield to maturity on this bond.

f. Assume you bought this bond from this investor at the end of year 2, how much would you pay for that bond if the market interest rate is 5%?

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