Case 3: We find the data for a municipal bond issued by theIllinois state government. The bond’s “last trade date” (i.e.,settlement date) is June 05, 2019. The bond’s “maturity date” isMarch 14, 2054. The bond’s “coupon rate” is fixed as “5.000%” peryear. The bond’s coupon “payment frequency” is “semi-annual”. Thebond’s “last trade yield” (i.e., yield-to-maturity) is quoted as“4.280%” per year.

(a) Based on the aforementioned settlement date, maturity date,coupon rate, coupon payment frequency and yield to maturity, whatshall be the corresponding bond PRICE (relative to redemption parof 100)?

(b) Assumes that the Fed suddenly tightens its monetary policynow, causing interest rates to rise across financial markets. Theaforementioned IL municipal bond’s yield-to-maturity also risesfrom 4.280% to “5.280%” per year. Will the bond PRICE go up or godown then? By how much?

(c) Assumes that the Fed suddenly loosens its monetary policynow, causing interest rates to rise across financial markets. Theaforementioned IL municipal bond’s yield-to-maturity also dropsfrom 4.280% to “3.280%” per year. Will the bond PRICE go up or godown then? By how much?

(d) Based on your answers to (b) and (c), is there a positive,negative or zero association between bond YIELD and its PRICE?(Hint: Positive association means “moving in the same direction”,negative association means “moving in the opposite directions”,while zero association means “one moves but the other does not getaffected”.)

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