Three years ago, STC issued 10-year internatinal bonds that pay US investors 8% semiannually.

Assume that the bond has a $1,000-par-value. If the bond currently sells for $826,answer the following?

a. The yield to maturity on this bond is

?%. (Round to 2 decimal places.)

b. If you are expecting the Federal Reserve (US central bank) to lower interest rates in the near future and you want to gain profit by speculating on a bond, will you buy or sell this bond? Explain. (Select the best answer below.)

A.

You should buy the bond. The relationship between bond price and bond yield is inverse. If the interest rate drops in the near future, the bond price will increase.

B.

You should not buy the bond. The relationship between bond price and bond yield is direct. If the interest rate drops in the near future, the bond price will decrease.