Assume you have two bonds:

• Bond X: A zero coupon bond with a face value of $1,000 and exactly 8 years remaining that is selling for $560
• Bond Y: A 6% coupon bond with a face value of $1,000 selling for $650 with coupon payments made every 6 months. The last coupon payment was made yesterday, and the bond matures in 4 years, 6 months.

1. What is the implied interest rate on these two bonds, expressed as the effective annual rate? What is the yield to maturity?
2. What do the differences in interest rates tell you about the two companies?
3. Now assume that your fund buys both of these bonds today. You expect that interest rates will rise to 10% for both bonds in 2 years. If you sell at the end of 2 years (right after the coupon payment for Bond Y), what is the return on your investment, expressed as the effective annual rate? What is the yield to maturity?