4-Consider the riskiness of the three bonds listed in Exhibit 14.1.

a- Explain the difference between price risk and re investment rate risk.

b- which of the bonds has the most price risk?why?

c-Assume that you bought 5-year, 15-year, and 25-year bonds, all with a 10 percent coupon rate and semi annual coupons, at their $1,000 par values. which bond's value will be affected most if interest rates rise to 13 percent? which will be affected least?

d- assume that your investment horizon or expected holding period is 25 years.which of the bonds listed in Exhibit 14.1 has the greatest reinvesment rate risk?

e- Assume that you plan to keep your money invested, and to reinvest all intrest receipts, for five years, furthermore, assume you bought the five year bond for $800, and interest rates suddenly fell to 5 percent and remained at that level for five years.

(1) Set up a timeline that can be used to calculate the actual rate of return on the bond (Hint each interest receipt must be compounded to the maturity date at the reinvestment rate and then summed , along with the maturity value. then , the rate of return that equates this terminal value to the inital price of the bond is the bond's realized rate of return) How dose your answer compare with the bond's YTM?

(2) What if interst rates had risen to 15 % rather than fallen to 5 %?

(3) How would the result have differed if you had bought the 25 year bond rather than the 5-year bond?

f- Today, many bond market participants are speculators as opposed to long term investors. if you thought interest rates were going to fall from current levels, what bond maturity would you buy to maximize short-term capital gains?