Suppose a 30-year Treasury bond with face value $1000 is sold for $412. (a) What is the annualized yield to maturity?

(b) In equilibrium, Treasury bonds are sold for a price such that the annualized yield to maturity is equal to the prevailing market interest rate for similar assets (similar risk, same present value cash flows, same maturity, etc). Suppose next year (29 years until maturity) interest rates are 2%. Is this an increase or decrease in interest rates? What will be the new price of the bond?

(c) In part (b) above, suppose you sold the bond at the end of the first year. What was your capital gain / loss?

(d) If you expect an increase in interest rates, are you more or less likely to hold long-term, fixed-interest rate, bonds? Explain.