[20 marks) 3. Answer the following questions on bonds. a) You are working as a summer are working as a summer intern at Capula Investment Management, a London-based hedge fund focusing on fixed income markets. The fixed income strategy desk analysts have estimated spot interest rates as follows Year Spot Interest Rate 0.25% 0.50% 0.75% 1.00% 1.259 (1) You are asked to calculate the present values of the following government bonds with annual coupon payments. Assume annual compounding and a Face Value of $1.000. . 0.5 percent coupon (annual coupon rate), five-year maturity. 1.5 percent coupon (annual coupon rate), five-year maturity. [6 marks] (ii) Calculate the yield to maturity of two bonds in part (i). [4 marks) (iii) Explain why the 0.5 percent coupon bond is selling at discount (Price Face Value). [4 marks] b)(i) Two bonds have identical times to maturity, coupon rates and face value. One is callable at $105, the other (a straight bond) is selling at $110. Which bond should have the higher yield to maturity? Why? [3 marks) (ii) A puttable bond always has a higher price and a lower yield to maturity than a straight bond. Why? [3 marks)