Question: Consider a 2 - year, risk - free bond with a coupon rate of 5 % ( annual coupons ) and a face amount of

Consider a 2-year, risk-free bond with a coupon rate of 5%(annual coupons) and a face amount of $1,000.
a. What is price of this bond if the YTM is 4%?5%?6%?
b. If you buy the bond for $1,000(YTM =5%, hold it to maturity and you reinvest the coupon payment at 4%, what is the annual HPR on your investment?
c. If you buy the bond for $1,000(YTM =5%), then the yield increases to 6%, and you sell the bond immediately after the first coupon payment (in 1 year), what is your HPR?
d. If the yield on the bond is )=($1,000,
i. What is the Macaulay duration?
ii. If the yield increases to 6% immediately, what does the duration approximation predict will be the percentage change in the bond price?
iii. If the yield increases to 6% immediately, what is the actual percentage change in the bond price?
Consider a 2-year, risk-free bond with a coupon rate of 5%(annual

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