1. Assume you have a one-year investment horizon and are trying to choose among three bonds with a par value of $1000. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond. The second has an 6% coupon rate and pays the $60 coupon once per year. The third has a 10% coupon rate and pays the $100 coupon per year. All three bonds are now priced to yield 6% to maturity.

A. What are the prices of the three bonds today?

B. If the yield to maturity stays at 6% one year later, what are their prices then? And what is your rate of return on each bond during the one-year holding period (note that you will also receive one coupon payment)?

(hint: when calculating price next year, p1, for the bond pricing formula, use T=9. The rate of return should be calculated as (p1-p0+coupon)/p0, where p0 is the bond's price today from A. )

C. If the yield to maturity goes up to 7% one year later, what is your rate of return of each bond during the one-year holding period?