1. Compute the value of the following bonds assuming a 3% discount rate (required rate of return):

A zero-coupon bond that pays $1,000 in five years

A bond that pays $1,000 in five years, with five annual coupon payments of $20 each

What is the coupon rate if coupon payments are $20 per year? At what discount rate would the value of the bond be "at par" (e.g., be worth $1,000?). Explain your reasoning.

1. What is likely to happen to interest rates if the rate of inflation suddenly increases?
2. Suppose there are two bonds each with coupon payments of $50. The first bond pays $1,000 in five years, and the other one pays $1,000 in ten years. If interest rates increased, would the value of the bonds increase or decrease? Which of the two bonds would have their value change more after the increase in interest rates? Explain your reasoning.