Part I. Bond 1. You are in charge of the bond trading and forward loan department of a large investment bank. You have the following YTM's for five default-free pure discount bonds as displayed on your computer terminal: Years to Maturity 1 2 3 4 5 YTM; 0.06 0.065 0.07 0.065 0.08 Where YTM; denotes the yield to maturity of a default free pure discount bond (zero coupon bond) maturing at year j. 1) A new summer intern from Emory has just told you that he thinks that 4 year treasury notes with annual coupons of $100 and face value of $1,000 are trading for $1,080.4. Would you ask the intern to recheck the price of this coupon bond? If so, why? If there is one actually traded for $1,000, how would you take this opportunity? 2) Suppose that you purchased the bond in part 1(a) at the price you calculated. It is now one year later and you just received the first coupon payment on the bond. At this time, the yield to maturities up to 3 year pure discount bonds are Years to Maturity YTM; 1 0.08 2 0.095 3 0.09 4 0.075 5 0.06 If you were to sell the bond now, what rate of return would you realize on your investment in the bond? (i.e., the HPR.)