Question 3 (20 marks)

1. Calculate the price of a bond with a face value of $1,000, coupon rate of 3% p.a., yield to maturity of 5% p.a. and ten years to maturity. The bond pays coupons semi-annually (5 marks)

2. What will the price be if the yield to maturity is 3% p.a. and 1% p.a.? (5 marks)

3. Based on your calculations in question 3a,b and c, explain the relationship between coupon rate, bond price and yield to maturity? (5 marks)
4. You were aware that the cash rate will fall and you have a portfolio of bonds that are one year and ten years. You want to sell some of them to meet your immediate needs. Use bond theory to explain from which bond you will sell. (5 marks)