Reference no: EM133134435

a) Calculate the price of a $1000 face value five year coupon bond when the yield to maturity is 5%, and the coupon rate is 7%.

b) Now suppose that the yield to maturity falls to 4%. Calculate the new price of this coupon bond.

c) Using the market for bonds (bond demand and bond supply), name two things on the demand side and two things on the supply side that could have caused this change in the price of this bond. Be sure to support each reason with a brief explanation (just don't list them).

d) Draw a supply / demand diagram for this bond depicting the original price as point A and then show, the price change and label as point B. For this part, assume supply is constant and that the change in price is driven by changes in demand (please refer to why demand has changed, give one reason)

e) Draw a supply / demand diagram for this bond depicting the original price as point A and then show, the price change and label as point B. For this part, assume demand is constant and that the change in price is driven by changes in supply (please refer to why supply has changed, give one reason)

f) Suppose you purchased the bond at it original price (yield to maturity = 5%) held it for one year (collected one coupon payment) and sold it at the new price (part b). What is your rate of return?