If you purchase a $1,000 face value, 4% annual coupon bond with 6 years to maturity when the going interest rate (or yield) is 3%, then you would pay $1,054.17 for the bond.

a) What is your expected rate of return on the bond assuming interest rates do not change and you hold the bond to maturity?

b) Suppose that you sell it a year later at which time the going interest rate has risen to 3.5%. What is your rate of return on the bond?

c) What is your expected rate of return on the bond assuming interest rates do not change and you sell the bond one year later?