Submit your answers as a Word document. Make sure to show your work for all quantitative questions, and make sure to fully explain your answers using references to the background readings for any conceptual questions. Questions 1 and 3 will require Excel, so submit an Excel file that shows your computational steps as a separate file in addition to your Word file.
Suppose you buy a bond that will pay $1000 in ten years along with an annual coupon payment of $50 and the interest rate is 4%. Answer the following questions:
What is the value of this bond?
Now suppose the bond has no coupon payments but still pays $1000 in ten years. What is the value of this bond?
What would happen to the value of the bond if the inflation rate unexpectedly goes up? What the bond value increase or decrease?
Now suppose the bond still pays an annual coupon of $50 but the interest rate drops to 2%. What is the new value of this bond?
