10. Suppose that you are considering the purchase of a coupon bond that has the following future payments: $600 in one year, $600 in two years, $600 in three years, and $600 + $10,000 in four years.

a. What is the bond worth today if the market interest rate is 6%? What is the bonds current yield?

b. Suppose that you have just purchased the bond, and suddenly the market interest rate falls to 5% for the foreseeable future. What is the bond worth now? What is its current yield now?

c. Suppose that one year has elapsed, you have received the first coupon payment of $600, and the market interest rate is still 5%. How much would another investor be willing to pay for the bond? Suppose you sell the bond at the current market price, what will be your rate of return on the bond? If another investor had bought the bond a year ago for the amount you calculated in (b), what would be that investors rate of return?

d. Suppose that two years have elapsed since you bought the bond, and you have received the first two coupon payments of $600 each. Now suppose that the market interest rate suddenly jumps to 10%. How much would another investor be willing to pay for your bond? What will the bonds current yield be over the next year? Suppose that another investor had bought the bond at the price you calculated in (c). What would that investors rate of return have been over the past year?