Question #$3$

Suppose there are $2$ bonds with the following characteristics. There is a $2-$year treasury bond

with a face value of $$1000,$ a $18\%$ coupon rate, and the yield to maturity is $10\%.$ There is also a

$3-$year treasury bond with $$1000$ face value, a $15\%$ coupon rate, and the yield to maturity is $8\%.$

a$)$ Calculate the current or fair price of each bond right now.

b$)$ Calculate the duration of each bond right now.

c$)$ If interest rates in the economy in overall were to rise from $6\%$ to $6\mathrm{.}75\%,$ how much

would we expect the price of each bond to change by$?$ Provide a calculation.

d$)$ Suppose Tricia purchased the $3-$year bond at the price calculated in part a$).$ Now one year

passes and Tricia sells the bond. Assume the yield to maturity is still $8\%,$ what would be

Jacqueline's rate of return of the $1-$year period she sold the bond?

e$)$ Instead suppose Tricia kept the $3-$year bond all the way until it matured $($expired$).$ What

would be an estimate of her rate of return per year?