You are considering buying a bond that will be issued today. It will mature in 7 years. The annual coupon rate is 2%. Face value is $1,000. The annual market rate is 1%.

Part I:

a) Assume the bond does not have any default/tax/liquity/inflation risk. Without making any calculations, do you know if this bond will be selling at a price below or above $1,000? Explain your reasoning with one sentence.

b) Without making any calculations, can you tell if the current yield is smaller or greater than the coupon rate? Explain your reasoning with one sentence.

Part II: Now assume that the bond has a default risk within its first year. If the default occurs, only half of all coupon and face value payments will be made. The promised yield on this bond today is 1.3%. What is the default rate?