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?