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4. Calculate the duration of a $1,000 6% coupon bond with three years to maturity. Assume that all market interest rates are 79. 5. Consider
4. Calculate the duration of a $1,000 6% coupon bond with three years to maturity. Assume that all market interest rates are 79. 5. Consider the bond in the previous question. Calculate the expected price change if interest rates drop to 6.75% using the duration approximation Calculate the actual price change using discounted cash flow. 6. Assume you just deposited $1,000 into a bank account. The current real interest rate is 2% and inflation is expected to be 6% over the next year. What nominal interest rate would you require from the bank over the next year? How much money will you have at the end of one year? If you are saving to buy a stereo that currently sells for $1,050, will you have enough to buy it? 7. Suppose that Expectation theory holds. In the market 1. price of 1-year zero coupon is 970 today. 2. price of 2-year zero coupon is 930 today. 3. price of 3-year zero coupon is 900 today. Question 1. What is a price of 1-year zero coupon to be issued a year from now (at t=1)? Question 2. What is a price of 1-year zero coupon to be issued two years from now (at t=2)2 Question 3. What is a price of 2-year zero coupon to be issued a year from now (at t=1)? Question 4. What is a price of 3-year 5% annual coupon bond today
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