Consider a 15-year 7% coupon bond with a par value of $1,000 and semi-annual coupon payments. The bond price is $800.

What is the yield to maturity on the bond? (4 points)

An investor bought the bond at $800 and plan to sell the bond in 5 years. The investor assumes that he can reinvest the coupons at a rate of 9%. What is the investor's horizon yield (ie. total yield) during his investment horizon? Assuming the market discount rate at the end of his investment horizon is 10%.

Right after the investor bought the bond, the market interest rate unexpectedly went up to 11%. At this new reinvestment rate, what is the investor's interest-on-interest income at the end of his investment horizon (i.e., after 5 years)?

Right after he bought the bond, the market interest rate unexpectedly went up to 11%. After this rate hike, what is the capital gain/loss for the investor at the end of his investment horizon? Hint: Carrying value is the hypothetic price of the bond if the bond's yield remains at the initial yield to maturity, which is what you find in point i) above. (6 points)

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