Apple Inc has a bond with $1000 face value and a coupon rate of 8%, and Apple Inc has another bond with $1000 face value and a coupon rate of 12%. Both bonds pay coupon payment on January 1st in each year. Both bonds have 10-year maturities from today (January 2, 2010) and both sell at a yield to maturity of 10%. Suppose their yields to maturity next year are still 10%.

Now, suppose you purchase two bonds today (January 2, 2010) and hold both bonds for 1 year (until January 1, 2011).

(i) What is the rate of return on each bond? [Rate or Return (RoR) = (Coupon income + Bond price changes)/initial investment in the bond.]

(ii) Does the higher coupon bond provide a higher rate of return?