1. Consider a bond (with par value = $1,000) paying a coupon rate of 5% per year semiannually when the market interest rate is only 4% per half-year. The bond has 3 years until maturity.

a. Find the bond's price today and 6 months from now after the next coupon is paid.

Current price:?

Price after six months:?

b. What is the total (6-month) rate of return on the bond?

Rate of return:?

2. A 5-year bond of a firm in severe financial distress has a coupon rate of 14% and sells for $950. The firm is currently renegotiating the debt, and it appears that the lenders will allow the firm to reduce coupon payments on the bond to one-half the originally contracted amount. The firm can handle these lower payments. What are the stated and expected yield to maturity of the bonds? The bond makes its coupon payments annually.

Stated yield to maturity:?

Expected yield to maturity:?