1. What is the maximum price you would be willing to pay for a bond with 12% coupon

and 7 years to maturity, assuming that you plan to hold the bond until maturity? Your

cost of capital is 10%.

2. What price would you pay for the bond in Problem 1 if you only planned to hold the

bond for 4 years and then could sell it for $1,100? Your cost of capital is 10%, and you

will sell the bond for $1,100 immediately after you receive the eighth interest payment.

3. What price would you pay for the bond in Problem 1 if you plan to hold the bond for 5

years and sell it for $1050 immediately before you receive the tenth interest payment?

4. Today you can purchase for $900 a 15% coupon bond that will mature in 10 years.

What will be your yield to maturity (YTM) if you hold the bond until maturity and are

able to reinvest all cash flows when they occur at the YTM?

5. What will be your realized holding period return (HPR) for the bond in Problem 4 if you

only hold it for 6 years and then are able to sell it for $1200 after receiving the twelfth

interest payment? (You are able to reinvest all cash flows at the HPR.)

6. What will be your realized holding period return if you hold the bond in problem 4 for

three years and sell it for $800 immediately before you would receive the sixth interest

payment? (You will reinvest all cash flows at the HPR.)

7. What will be the holding period return for the bond in problem 4 if you hold it until

maturity but are only able to reinvest the cash flows at a fixed rate of 4% compounded

semiannually?