Define interest rate risk

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How much would you pay today for the following coupon bond where the coupon is received once a year over the 5 year holding period. As always show all formulas, calculations and work for full credit.

a. n=5 coupon rate=5% (.05) yield to maturity=i=7% Face=$1000

b. Define interest rate risk. Show using a numerical example that the interest rate risk on a long term bond is greater than that on a short-term bond.

c. What is the yield to maturity on a money market instrument with 250 days to maturity and a face of $1000 that is currently priced at $985.

d. What is the yield on a discount basis on a money market instrument with 270 days to maturity and a face of $1000 with a current price of $975.

e. What nominal rate of interest (yield to maturity) would you require if you lent $1000 and you required a real rate of return of 6.5% (ir) with an expected rate of inflation of 2%.

f. What is the yield to maturity on a fixed payment loan of due in 4 years that is currently priced at $500 with a fixed future payment in four years of $750.

Reference no: EM131007699

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