A six-year government bond has an annual coupon rate of 5% and offers a yield-to-maturity (YTM) of 3%, compounded annually.

Required: (6 points each)

1. Suppose that one year later the bond's yield-to-maturity is still 3%, compounded annually. What annual return would the bondholder have earned over the 12-month period?

2. Now suppose that the bond's yield-to-maturity is 2% compounded annually at the end of the first

year. What annual return would the bondholder have earned in this case?