1. A bond with $1,000 face value, 10% coupon, market interest rates of %7, and 10 years to maturity.

a. Calculate the duration of the bond. Show calculation.

b. Assume that market interest rates increased to 12%, re-calculate the duration of the bond

c. Comment generally on the relationships between the interest rates, coupons, and duration

2.

A. Calculate the one-year return on a 10% 2-year bond with 7% interest rates and interest rates are expected to rise to 10%. Face value is 1,000. Show your calculation.

b. Calculate the one-year return on a 10% 3-year bond with 7% interest rates and interest rates are expected to rise to 10%. Face value is 1,000. Show your calculation.

c. Comment generally on the return of the two bonds.