Assume that you are trying to choose which of 3 bonds to buy:

• A zero-coupon bond
• A 5% coupon bond
• An 8% coupon bond

Each has a face value of $1,000. They all mature in 10 years, have the same default risk and pay any coupons annually. There are no other special provisions.

(a)If the current market rate of interest is 4%, what are the prices of the three bonds?

(b) If your holding period is one year only, what will be the holding period rate of return for each bond?