Consider a coupon bond that has a face value of $200, a coupon rate of 10%, and has 3 years to maturity. Suppose the bond is currently trading at $210.

a) Using a bond-pricing equation, show how you would calculate this bond's yield to maturity. Given the bond is trading at a premium (i.e. above face value), state whether the yield on the bond is below or above 10%? [You don't actually need to calculate the yield.]

b) Suppose you bought this bond at $210 and held it for one year, during which the bond price decreased to $200. What was your (nominal) rate of return from holding the bond for one year? Given an inflation rate of 2% during the year, what was your real rate of return? Explain.

c) Suppose the current yield on a 1-year bond is 3%, while the yield on a 2-year bond is 4.5%. Suppose investors expect the 1-year bond yield to be 5% in a year. What is the current liquidity premium on the 2-year bonds? Explain using a term-structure equation.