Question 5. (8 points) On August 15, 2016, a 5 year bond (maturing on August 15, 2021) with a coupon rate of 1.875%, semiannual coupons, and a face value of $1000 was trading at a yield to maturity of 1.34%. (a) What was the price of the bond on August 15, 2016? On February 15, 2017, the same bond (maturing on August 15, 2021) was now trading at a yield to maturity of 2.05%. (b) What was the price of the bond on February 15, 2017? (c) If you bought the bond on August 15, 2016, and sold it after the receiving the coupons through and including on February 15, 2017, what annual rate of return (APR) would you receive on this investment? How does your realized rate of return compare to the yield to maturity when you first purchased the bond?

Question 6. (10 points) You are considering investing in a 12% coupon rate bond with a three-year maturity and a face value of 1000. You observe the following prices for discount, or zero-coupon, bonds: Maturity Price 1 98.04 2 94.26 3 86.39 (a) What is the fair market price of the bond? (b) What is the yield to maturity of the bond? (c) What does the market expect the 1 year rate to be in 1 year from now? (d) What does the market expect the 1 year rate to be in 2 years from now? (e) What does the market expect the 2 year rate to be in 1 year from now?