1.Now consider a four-year bond with a face value of $5,000 and an annual coupon payment of $125. Suppose prevailing interest rates in the economy are 1.0%.

a.Calculate the predicted price of this bond. Did the price change by more or less than what you found in part a of the previous question?

b.Given your answer to part a, which would you rather hold if interest rates in the economy are expected to increase: long-term bonds or short-term bonds? Why?