Question 3

A bond is just issued with exactly 10 years to maturity. It pays a quarterly coupon of 6% per annum. The current yield is 6% per annum. The face value is $1000.

(I) What is the price of the bond today?

(II) Will the bond be traded at a discount or a premium if the yield immediately increases to 7%? Why?

(III) The reserve bank is buying a large amount of government securities in the market. What is the impact on interest rates?

[6+2+2] = 10 marks