Suppose you purchase a $10-$year bond with $6\mathrm{.}64\%$ annual coupons. You hold the bond for $4$years$,$ and sell it immediately after receiving the fourth coupon. If the$$ bond's yield to maturity was $5\mathrm{.}17\%$ when you purchased and sold the$$ bond,

a$.$ what cash flows will you pay and receive from your investment in the bond per $$$$100$ face$$ value?

b$.$ what is the annual rate of return of your$$ investment?

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Part $1$

a$.$ What cash flows will you pay and receive from your investment in the bond per $$$$100$ face$$ value?

The cash flows from the investment are shown in the following$$ timeline:$($Round to the best choice$$ below.$)$

A$.$

The timeline starts at Year $0$ and ends at Year $4.$ The timeline shows a cash flow of $107\mathrm{.}42$ in Year $0$ and a cash flow of $6\mathrm{.}64$ each year from Year $1$ to Year $3.$ In Year $4,$ the cash flow is $114\mathrm{.}06.$

Years$01234$

Cash Flows$ $107\mathrm{.}42$$ $6\mathrm{.}64$$ $6\mathrm{.}64$$ $6\mathrm{.}64$$ $114\mathrm{.}06$

B$.$

The timeline starts at Year $0$ and ends at Year $4.$ The timeline shows a cash flow of minus $114\mathrm{.}06$ in Year $0$ and a cash flow of $6\mathrm{.}64$ each year from Year $1$ to Year $3.$ In Year $4,$ the cash flow is $107\mathrm{.}42.$

Years$01234$

Cash Flowsnegative $ $114\mathrm{.}06$$ $6\mathrm{.}64$$ $6\mathrm{.}64$$ $6\mathrm{.}64$$ $107\mathrm{.}42$

C$.$

The timeline starts at Year $0$ and ends at Year $4.$ The timeline shows a cash flow of minus $111\mathrm{.}26$ in Year $0$ and a cash flow of $6\mathrm{.}64$ each year from Year $1$ to Year $3.$ In Year $4,$ the cash flow is $114\mathrm{.}06.$

Years$01234$

Cash Flowsnegative $ $111\mathrm{.}26$$ $6\mathrm{.}64$$ $6\mathrm{.}64$$ $6\mathrm{.}64$$ $114\mathrm{.}06$

Your answer is correct.D$.$

The timeline starts at Year $0$ and ends at Year $4.$ The timeline shows a cash flow of $111\mathrm{.}26$ in Year $0$ and a cash flow of $6\mathrm{.}64$ each year from Year $1$ to Year $3.$ In Year $4,$ the cash flow is $114\mathrm{.}06.$

Years$01234$

Cash Flows$ $111\mathrm{.}26$$ $6\mathrm{.}64$$ $6\mathrm{.}64$$ $6\mathrm{.}64$$ $114\mathrm{.}06$

Part $2$

b$.$ What is the annual rate of return of your$$ investment?

The annual rate of return of your investment is

$$

enter your response here$\%.($Round to two decimal$$ places.$)$The following table summarizes the yields to maturity on several one$-$year, zero$-$coupon securities: $.($Note: The yields displayed in the table are annually compounded yields.$)$

a$.$ What is the price $($expressed as a percentage of the face value$)$ of a one$-$year, zero$-$coupon corporate bond with an AAA rating?

b$.$ What is the credit spread on AAA$-$rated corporate bonds?

c$.$ What is the credit spread on B$-$rated corporate bonds?

d$.$ How does the credit spread change with the bond rating? Why?

a$.$ What is the price $($expressed as a percentage of the face value$)$ of a one$-$year, zero$-$coupon corporate bond with a AAA rating?

The price of this bond will be

$\%.($Round to three decimal places.$)$

Data table

$($Click on the following icon in order to copy its contents into a spreadsheet.$)$