a. Explain which of the following bonds has higher interest rate sensitivity. Bond A is a 15-year, noncallable bond with a coupon rate of 7%, selling at par.

Bond B is a 15-year, callable bond with a coupon rate of 9%, also selling at par. (4 marks)

b. Tony, a fixed-income portfolio manager, is managing a portfolio of $10 million. His target duration is 7 years, and he can choose from two bonds: a zero-coupon bond with maturity of 3 years, and a perpetuity, each currently yielding 8%.

i. What is the weighting of each bond will Tony hold in his portfolio? (5 marks)

ii. Suppose that a year has passed and the yield has fallen to 6%. What will these weightings be if target duration is now 6 years? (5 marks)