Consider a 5-year Treasury bond with a face value of $1000 and a coupon rate of 4%. You just bought this bond for $956.7.

Answer parts (3.1) (3.3) assuming that you plan to hold the bond until maturity.

3.1 Write the expression needed to calculate the yield to maturity (YTM) of this bond and then use a financial calculator or excel to calculate YTM. What would be the current yield?

Hint: the expression should be in terms of the present value of cash flows

3.2 Suppose you expect that the future market interest rate (which is also the reinvestment rate) will be the same as the YTM from part (3.1) until maturity. Calculate the (expected) annual realized compound yield (or annual holding period return (HPR)) of this bond at maturity.

3.3 Suppose instead that you expect the market interest rate to remain the same as YTM from part (3.1) for the first two years and then increase to 7% for the next two years and then decrease to 5% for the fifth year. Calculate the (expected) annual realized compound yield of this bond if you hold it until maturity.

Now suppose that you expect the interest rate to behave as in question (3.3), but you plan to hold the bond only for 2 years (i.e., you plan to sell it just after getting the second coupon payment).

3.4 Calculate your (expected) annual realized compound yield or annual holding period return (HPR) for this bond.