You buy a 5-year bond with a coupon rate of 6% for $1000 (annual coupons paid). One year later, you sell the bond. At that time, the yield curve…

You buy a 5-year bond with a coupon rate of 6% for $1000 (annual coupons paid). One year later, you sell the bond. At that time, the yield curve (based on zero coupon bonds) is as follows:

T                                  1                             2                                 3                              4                                5

rt (%)                        5.50                          6.50                          7.25                          7.75                          8.00

a.     What is the price of the bond in one year?

b.     What is the capital gain/loss on the sale of the bond?

c.     What is your return on this investment?

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