Consider a 5 year to maturity Coupon bond with Face Value = $1000 and a coupon payment of $40; the bond was originally issued in 2021 and will mature in 2026.

a. Show the Present Value (PV) for the bond at the time that it was issued; you MUST set up the entire problem (mathematically) to illustrate how PV is obtained. Make sure to substitute in for all values in your equation, including for n, C, i, FV, etc. Use the material learned in class to SET UP THE PROBLEM only; you are not required to calculate PV. Simply set it up & substitute in for all values.

b. Today (2023) the interest rate is at some level (# not known), however suppose that the interest rate (next year) is expected to be at 6%. How would you calculate the expected price of bonds in 2024? Use the material learned in class to SET UP THE PROBLEM to illustrate how the price is calculated; you ARE NOT required to use a calculator to obtain the exact value (do not spend time on this as this is not needed).

c. Is the price of the coupon bond in 2024 larger, smaller, or unchanged from the initial price? Just state.

d. Suppose that bond prices are expected to rise in the future starting next year. What could be causing a RISE in expected future bond prices? Provide a discussion along with an example (it must state whether it is rising or falling). Make sure to explain how it drives the change in the expected future price.