Q. Assume you are thinking of buying a $1000 face-value coupon bond with a coupon rate of 10%, a maturity of 3 years and a cost of $1079.
a. Is yield to maturity going to be above or below 10%? Why?
b. Write down equation that can be solved for yield to maturity of this bond: that is, equation that equates Current value of bond payments to cost of bond.
c. Estimate Current value of bond when interest rate is 8%.
d. Must yield to maturity be above or below 8%?
e. Estimate Current value of bond when interest rate is 5%.
f. Must yield to maturity be above or below 5%?