Question:
Suppose that 5-year government bonds are selling on a yield of 4 percent. Value a 5-year bond with a 6 percent coupon. Start by assuming that the bond makes annual coupon payments. Then rework your answer assuming that the same bond pays semiannual coupons and the yield refers to a semiannually compounded rate.
Further, how would the bond value in each case change if interest rates fall to 3 percent?