Suppose that you are considering investing in a four-year bond that has a par value of $1,000 and

a coupon rate of 6%.

(a) Draw a timeline for this bond.

(b) What is the price of the bond if the market interest rate on similar bonds is 6%? What is the

bond's current yield?

(c) Suppose that you purchase the bond, and the next day the market interest rate on similar

bonds falls to 5%. What will be price of your bond be now? What will its current yield be?

(d) Now suppose that one year has gone by since your bought the bond, and you have received

the first coupon payment. How much would another investor now be willing to pay for the

bond? What was your total return on the bond? (Market interest rate remains at 5%.)

(e) Now suppose that two years have gone by since you bought the bond and that you have

received the first two coupon payments. At this point, the market interest rate on similar

bonds unexpectedly rises to 10%. How much would another investor be willing to pay for

your bond?