Using the Modern Term Structure theory to explain the normal upward sloping treasury yield curve.

A bond has a coupon of $40 with a $1000 face value. Its currently trading at $1,025 with 7 years to maturity.

Whats the coupon rate and current yield?

A treasury STRIPS with 13 years until maturity has a face value of $10,000. Its trading at a price of $4,131.

Whats the YTM of the STRIPS?

A) explain the Fisher Effect

The current inflation expectation is low at about 1%, if the real rate of interest long term is 2%, what will be the yield on treasury bills based on Fisher Effect?

ABC company bond has a maturity of 8 years with a modified duration of 6.5 years. XYZ Company has a maturity of 10 years with a modified duration of 8 years. Currently the market interest rate is 2%.

Whats will be the price change of these two bonds if market interest rate increases to 2.5%?

Which bond you will prefer if you expect that interest rate will go up from now?