1) For a consol bond which pays a fixed coupon payment of $100, if the yield to maturity of this consol bond is 10% at the beginning of the year, and drop to 5% at the end of the year. What is the annual rate of return of consol bond? ( Hint : calculate the price of the bond at the beginning and end of the year each ) (5 marks)
2) For a coupon bond with coupon rate of 10% maturing in 2 years and selling at its face value. If the yield to maturity is 10% at the beginning of the year, and drop to 5% at the end of the year. What is the annual rate of return of this coupon bond ? (5 marks)
3) Which one is a better investment? Can you relate your results to the theory on interest rate risk? (2 mark)


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