Question 1. You open the Wall Street Journal and notice a bond with a nine year maturity, 10% coupon rate, annual coupons, and $100 face value trading for $112.49.
(a) What is the yield to maturity of the bond?-
(b) If the yield to maturity changed to 7%, what would be the price of the bond?
(c) Say you purchased the bond when the price was $112.49. After one year of holding the bond and right after receiving the first coupon, you decide to sell the bond. If the yield to maturity when you sell the bond is 6%
What are the cash flows you would receive from this investment?
What rate of return would you receive on this investment over the one year?
Question 2. You have decided that you want to purchase a house 5 years from now. You expect that you will need $18,000 for a down payment in 5 years time. Luckily, you have recently received $24,000 in cash from relatives. If the current rates on 5 year zero coupon bonds are 4%,
(a) how much money do you need to invest in zero coupon bonds in order to have your $18,000 down payment when you want to purchase the house?
(b) how much money can you spend today?