Suppose that on October 8, 2013 ACME Inc. issued 10-year coupon bonds with a face value of $1,000 and coupon payments of $100. (the coupons are paid each year on October 8, starting with the year 2014). Suppose that on October 8, 2013, ACME bonds sold for $950.

5. What can you say about the value of the the yield to maturity paid by ACME bonds, without calculating it?

Suppose that in 2017 the interest rate decreases to 10%.

6. What events might lead to a decrease in interest rate? List at least two such events. Explain.

7. What should be the price of an ACME bond today? What should be the price of an ACME bond one year from today?

8. If you buy a bond today with the intent on selling it next year, What rate of return do you expect? What is the current yield and the rate of capital gain?