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a. (15%) (Bonds) A $1000 bond has a coupon rate of 4 percent and coupons are payable annually. Suppose there are 8 years left on the bond, and you purchased it at a yield of maturity of 6%. (2%) How much are you paying for the bond?

b. (2%) Are you buying at a premium or discount? Explain the intuition of your answer with reference to the coupon rate and the yield to maturity.

c. (2%) What is the current yield of the bond?

d. (3%) Suppose you expect to sell you bond next year for a yield to maturity of 4%, what is the expected selling price of the bond?
e (3%) What is the rate of returns of the bond for you?

f. (3%) Without doing the calculations, what will happen to the price of the bond if company’s credit rating is suddenly adjusted downwards? Briefly explain e.


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