Q1: The coupon bond issued by the company "Blueberry" in Feb. 2019 has a face value of $100 and a coupon rate of 5%. The years to maturity are two years. Assume that there is no risk of default. Currently (in 2019), the market for the coupon bonds issued by "Blueberry" is

described by the demand function and the supply function: Q= 25,200/pp

bond;

Q= 100 + 2p, where Q is the quantity supplied for the bond, and p is the market price for the bond.

1). Melissa bought the coupon bond at the market equilibrium price. Please compute the market equilibrium price and help Adam to calculate the Yield to Maturity (YTM) if he holds the bond to its maturity.

2). After one year of holding the bond, Melissa must sell the bond for liquidity reasons. Because the company "Blueberry" has issued more coupon bonds to satisfy its financial needs, the supply function is now Q= 155 + 2p. There is no change of the demand function. Please draw the graph for the bond market and compute the new equilibrium price for the bond. Please calculate Melissa's rate of capital gain/loss and rate of return.

Q2: A borrower can issue a 3-year discount bond with a face value of $1000 and sell it for price of $800. Calculate the yield to maturity for the discount bond. Alternatively, the borrower could issue a coupon bond with a face value of $800. What is the coupon rate the bond issuer have

to offer to sell the coupon bond at a price of $800, if the market demands a YTM for the coupon bond that equals to the YTM of the discount bond?