10. Suppose you purchase a bond recently issued by Costco Inc. on 01/2/2021. The bond matures on 01/2/2031 and has a coupon rate 2.140%. The coupons will be paid semi-annually.

a. You purchase the bond for $99.2010 (per $100 face value) on 01/2/2021. What is the bonds yield-to-maturity on this date?

The table below lists treasury yields on 01/2/2021 Date 1 Mo 2 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr 02/1/2021 0.11% 0.12% 0.12% 0.14% 0.14% 0.15% 0.16% 0.32% 0.52% 0.80% 1.35% 1.60%

b. Based on this information, what is Costcos credit spread on 01/2/2021?

Though you intend to hold the bond until maturity, you anticipate that there is a possibility that you will sell the bond after holding it for 3 years and collecting all the coupon payments made until then (including the coupon paid at year 3).

c. You are concerned that yields may rise as the economy recovers. Suppose that when you sell the bond in 3 years, the treasury yields at all maturities will have doubled from their values when you purchase the bond on 01/2/2021. Assume that when you sell the bond, the bonds credit spread is the same as when you purchased it (i.e., your answer to b.). Compute your internal rate of return from selling the bond after 3 years (as an APR).