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a. Peter has just bought a 7% coupon bond with a face value of $1,000 that matures in nine years and whose bond yield was quoted at 5.5% at the time of the purchase. The coupon is paid annually. Peter plans on holding the bond for three years. If he wants to earn a 6.5% rate of return on this investment, what yield should the bond have at the end of his holding period?

b. Five years ago Steve bought a 15-year, 8% coupon bond and bond’s yield at the time of the purchase was 7.5%. The coupon is paid annually. Steve sold the bond this morning when the bond’s yield was quoted at the level of 10%. What was Steve’s rate of return on the investment?

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