Problem 4 A 5-year coupon bond is priced at $100. It has a face and redemption value of $100 and a coupon rate of 10% per annum payable semiannually.

1. Use The Salesman's Rule to find the approximate per annum yield to maturity. Use a bond Rule to find the exact per annum yield to maturity.

b.If the coupons can be reinvested at 8% per annum compounded semiannually then find the total account balance at the end of 5 years (i.e. the terminal wealth of the bond at the end of term) and find the interest on interest at the end of the 5 years.

A 5-year Zero Coupon Bond has a yield to maturity of 9% per annum compounded semiannually.

c.If the same $100 was used to buy the Zero Coupon Bond then what would the account balance be at the end of 5 years? Which bond should Betty and Bob buy (and why)?

d.What is the per annum yield to maturity, compounded semiannually, for the Zero Coupon Bond to result in a "break-even" situation, i.e. no advantage to possession of either bond? This yield is called the "total dollar rate of return".