A six-year government bond makes annual coupon payments of 4 per cent and offers a yield of 8 per cent annually compounded. Suppose that, one year later, the bond still yields 8 per cent. What return has the bondholder earned over the 12-month period? Now suppose that the bond yields 6 per cent at the end of the year. What return would the bondholder earn in this case? The face value of the bond is £1,000.

(20 marks)