1. Suppose you buy a 10-year bond today for $1,050 and that the coupon rate is 7 percent paid semi-annually. After a year, the market interest rate increases to 8%, determine:

a) bond price

b) rate of return for the bond.

2. Which will you prefer to invest your $1,500:

a) a two year bond with interest rate of 9 percent

or

b) two one year bonds, Year 1, the bond will earn 8% and year 2 the second bond will earn 9%.