Question:

Suppose Insurance, Inc. would like to buy today a five-year, $1000 bond with a 5% coupon rate and semi-annual coupons. The bond was issued exactly one year earlier today. The current market interest rate on similar bonds is 6%.

- What should the price of this bond be today?
- Suppose that Insurance, Inc. held the bond until maturity, what should be its total rate of return on this bond?
- Now, suppose Insurance, Inc. bought the bond at its fair price today and one year later it sells the bond at $878.34. When Insurance, Inc. sells:
- What is the bond’s nominal yield?
- What is the bond’s yield to maturity?
- What is the bond’s current yield?
- What is the company’s total return on the bond, all else being equal?
- If the annual inflation rate were 2%, what is the company’s real rate of return?
- At maturity, what is the price of the bond, assuming the issuer were solvable? Provide a proof for your answer.

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