# 8.

(a) A 3-year bond (maturing on 1/1/2023) with a par value of $1000 makes semiannual payments at a coupon rate of 4%.

Calculate its price if the YTM is 5.1%.

(b)Assume that the above bond has a special feature where its coupon is reset based on the underlying 30-year bond rates. If the 30-year bond rate exceeds 3%, then the above bond will increase its coupon by 1%. Assume that on 1/1/2022, the 30-year bond rate crosses 3%. Re-calculate the price of the bond as of 1/1/2022. Assume the YTM changes to 5.5%.