On Dec 31, 2023, you paid $1,000 to purchase a bond, which matures on Dec 31, 2026 with a coupon 5% (annual) and a face value of $1,000. According to the latest news, you expect that Fed will maintain the same interest rate 5% in 2024 with a probability 80%, and decrease the interest rate to 4% with a probability 20%. a. Calculate the 1-yr rate of return (Dec 31, 2023 to Dec 31, 2024) if Fed maintains the same interest rate. b. Calculate the 1-yr rate of return (Dec 31, 2023 to Dec 31, 2024) if Fed decreases the interest rate to 4%. c. Calculate the expected 1-yr rate of return.

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