Consider a 10-year bond with annual coupon rate 8%. Suppose that the term structure

is at at 8%, i.e., spot rates for all maturities are 8%.

(a)

What is the bond price and YTM?

(b) Suppose that you buy the bond today and hold it for 10 years. What is your

return (expressed as an annual rate) if the term structure stays at at 8% for the

whole 10 years during which you hold the bond?

(c)

What is your return if the term structure moves down to 6% (still staying at) 6

months after you buy the bond, and then stays at 6% for the remainder of the 10

years?

(d)

What is your return if the term structure moves up to 10% (still staying at) 6

months after you buy the bond, and then stays at 10% for the remainder of the

10 years?

(e)

Comment on the relation between the bond's YTM and the 10-year return on the

bond