Question 2 : Term Structure and Bond Prices

a. Draw the current term structure of interest rates (as of today). Label both the axes and the points on the curve. Explain in less than 7 lines What does the current term structure, as you have graphed, imply for the future path of future interest rates? What causes the future change in rates in your opinion? b. Suppose you buy a 30-year par valued bond (assume annual coupons) with yield to maturity equal to the prevailing rate in part (a). You sell the bond after holding it for (6) years, right after receiving the coupon at that time. What is the return on your investment if the prevailing yield to maturity is 2% when you sell it? c. By what $ amount will a 10-year $100 face value, par coupon bond change if the yield to maturity (plotted above in (a)) of the 10-year bond increases by 1%? Show your computations. i. Explain the reason for the direction of the change (+ or - ) in price?