Alice bought a 3-year coupon bond at face value $1,000 at the beginning of year 2019. The bond promises to pay a coupon rate of 10% at the end of each year.

1. (3 points) Illustrate the cash ow of the bond on a timeline.

2. (2 points) What is the yield to maturity of the bond? (No calculation!) Suppose that Alice plans to sell the bond by the end of 2019 (after redeeming the rst coupon). The market interest rate is expected to rise to 20%.

3. (7 points) What is the rate of return from the investment? Is it higher or lower than 10%? Please explain. (Note: Please show clear deriva- tions. Answers without proper derivations will be given a zero.)