Suppose A-rated bonds were trading in the market at YTM of 10% on all maturities, and you bought an A-rated, 10-year, 9% coupon bond with face value of $1,000 and annual coupon payments. Suppose that immediately after you bought the bond the yield on such bonds dropped to 8% on all maturities and remained there until you sold the bond at your horizon date at the end of four years.

a. What price did you pay for the 10-year, 9% coupon bond?

b. Show in a flow matrix (similar to Figure 2.4A) the coupons you received on the bond and their values at your horizon date from reinvesting.

c. What is the price of the original 10-year bond at your horizon date?

d. What is your horizon date value and total return?