Duncan recently completed ACST1001 and is hoping to apply what he has learned to start investing.

The first investment he is considering is corporate bonds. Specifically, Duncan is interested in a $1,000 20-year semi-annual coupon bond with a coupon rate of 7%. The annual yield to maturity for such bonds is 5.5%.

b) Calculate the fair price Duncan should pay for one such bond, given market conditions. (2 marks)

c) Suppose that 6 months after he initially purchases this bond, immediately after receiving the coupon on that date, Duncan decides to sell his bond to his friend Ian. Ian pays a price that yields 6% p.a. effective. Calculate the price Ian paid, ignoring any other costs (such as brokerage). (2 marks)

d) Calculate the return on Duncans 6 month investment, expressed as a percentage. (1 mark)