Suppose that the yield to maturity on three-year Treasury notes is 1.3%. In year 0, you buy a note with a coupon rate of 2.5% and a face value of $1000.
a) Calculate the price of the note.
b) In year 1, which is one year later, you receive one coupon payment and decide to sell your note. Your note is now a two-year note. Its yield has fallen to 1%. Calculate its price and its return from year 0 to year 1.
c) Suppose instead that the yield has risen to 2%. Calculate the price of the two-year note and its return from year 0 to year 1.