Question C (4 points) Total Return of bond investments We buy a corporate bond with maturity in 3 years and an annual coupon of 2.75%. The applicable zero-coupon rates look as follows:

Question C (4 points) Total Return of bond investments We buy a corporate bond with maturity in 3 years and an annual coupon of 2.75%. The applicable zero-coupon rates look as follows: ly Swap 2.5% Credit spread 0.7% 2y 2.8% 0.7% 3.0% 0.7% We fear that within the coming year, the Fed will raise rates. In that case, the swap rates would most probably increase as well. Furthermore, it could be that the credit quality of our bond worsens and the market will ask for a higher risk premium. In our worst case scenario, it could be that the applicable zero-coupon rates will look as follows: ly 2y 3y Swap 2.9% 3.25% 3.5% Credit spread 1% 1.25% 1.5% 1. What is the fair price of the bond today? 2. What would be the Total Return for us after a holding period of one year if the above scenario came true? 3. What would be the Total Return for us if this scenario came true today already? Question C (4 points) Total Return of bond investments We buy a corporate bond with maturity in 3 years and an annual coupon of 2.75%. The applicable zero-coupon rates look as follows: ly Swap 2.5% Credit spread 0.7% 2y 2.8% 0.7% 3.0% 0.7% We fear that within the coming year, the Fed will raise rates. In that case, the swap rates would most probably increase as well. Furthermore, it could be that the credit quality of our bond worsens and the market will ask for a higher risk premium. In our worst case scenario, it could be that the applicable zero-coupon rates will look as follows: ly 2y 3y Swap 2.9% 3.25% 3.5% Credit spread 1% 1.25% 1.5% 1. What is the fair price of the bond today? 2. What would be the Total Return for us after a holding period of one year if the above scenario came true? 3. What would be the Total Return for us if this scenario came true today already