On July 23, 2016, Koala, Inc. issued a 10 year bond (with a typical $1000 face value) that had an annual coupon value of $55.[We are assuming that the 2020 coupon has just been redeemed.]

Initially, the bond was sold for the premium price of $1,025.

On July 23, 2020, this bond was selling for only $955.

The market rate of interest for a riskless corporate bond, of this maturity, was 4.5% on July 23, 2016, which reflects market expectations about future rates of inflation.

The market rate of interest for a riskless corporate bond, of this maturity, was 4.0% on July 23, 2020, which reflects market expectations about future rates of inflation.

1.What was the nominal yield on this bond on July 23, 2016?

2.What was the current yield on this bond on July 23, 2016?

3.What was the nominal yield on this bond on July 23, 2020?

4.What was the current yield on this bond on July 23, 2020?

5. What was the yield to maturity for this bond on July 23, 2016?

6. What was the yield to maturity for this bond on July 23, 2020?

7.What happened to the risk premium for this bond from July 23, 2016 to July 23, 2020?

8.Suppose that the market becomes even more certain that future rates of inflation will fall, and the market rate of interest for a riskless corporate bond, of this maturity, falls from 4.0% to 2.5% (i.e., today in 2020).If there is no further change in the risk premium expected for this Koala, Inc. bond, what will its selling price be?

9.For #8 above, what will then be this bond's yield to maturity?

10.Briefly, explain why this change may have occurred.[There are a million and one possibilities here, so just be speculative, but reasonable, brief and to the point.]