Section B - Medium Answer Questions

1. Imagine that the market yield to maturity for two-year bonds in a particular risk class is 9 per cent. You buy a bond in that risk class, which offers an annual coupon of 9 per cent for the next two years, with the first payment in one year. The bond will be redeemed at par OMR 100 in two years.

Calculate:

1. How much would you pay for the bond? (1.5 marks)
2. If the required yield to maturity on this bond type changes to 7 per cent, what will be the market price? (1.5 marks)