1. A $1, 000-face-value bond has a 10% coupon rate with a current price of $960 and its price is expected to increase to $980 in the following year. Calculate the
(a) current yield;
(b) expected rate of capital gain/loss;
(c) and, the expected rate of return.
2. Assume you purchased a $3, 000-face-value bond at face value with a 10% coupon rate and an initial yield of 5%. Now suppose in the second year of holding the bond, interest rates fall to 2.5%. Find the following information if the maturity on the bond is set for 4 years:
(a) market price of the bond in year two.
(b) capital gains or losses on the bond if sold in year two.
(c) return on the bond.