1. Bond 1 and Bond 2 both have a face value of $1,000. Bond 1 pays a 5% coupon (annual payments) while Bond 2 is a zero coupon bond. On November 30, 2014 (immediately after the annual coupon payment), Bond 1 had exactly 20 years to maturity, while Bond 2 had 15 years to maturity. The yield to maturity for each bond was 10% on November 30, 2014, and was 8% on November 30, 2015.

A. What was the price of each bond on November 30, 2014?

B.What was the duration of each bond on November 31, 2014?

C. What was the price of each bond on November 30, 2015?

D. What was the one-year return on each bond if the bond was purchased on November 31, 2014 (immediately after the coupon was paid) and was sold on November 31, 2015 (immediately after the coupon was received)?

E. Which bond was more sensitive to this interest rate change, and why? In your answer to this question, address the following items:

Based upon time to maturity, which bond should be more sensitive to the interest rate change?

Based upon the relative size of the coupon payments, which bond should be more sensitive to the interest rate change?

Which of these two effects dominated in this case? How do you know (other than by looking at your answers to Part D)?