2. Consider a coupon bond that has a face value of $1,000, a coupon rate of 4%, and five years to maturity (10 points):

a. What is the price of the bond if the yield to maturity on similar bonds is 6%?

b. What should its price be the following year if the yield to maturity on similar bonds falls to 5%? Would this change in yields be a good thing or not if you purchased the bond one year earlier at the price you calculated in (a) above? Explain. How does this example relate to interest-rate risk? (10 points)