423.8
8.Consider a 4-year, $1000 par 8% coupon bond with annual coupon payments.
a. Write down the cash flows for this bond. (5)
b.If the current yield curve shows the rates listed in the table, will this bond be priced at par, a discount, or at a premium? (5)
Maturity
Interest Rate
1 yr
5.0%
2 yrs
6.0%
3 yrs
6.7%
4 yrs
7.2%
c.Explain why it makes economic sense that the bond should be priced as you said in (b). (7)