Consider a $1000 face value 2-year government bond which provides coupons of 8% per annum paid semi-annually.

a) Calculate the current price of the bond if the interest rate over the period is constant at 5%.

• Price = $

b) Suppose the bond was being sold to you for $930 would you buy it?

If this bond is being sold to me for $930, I would (buy/not buy) it because it is being sold to me at a price (above/below) its present value.

c) If interest rates increase by 3 percentage points recalculate the price of the bond.

• Price = $

d) Given the increase in the interest rate, would you rather be holding long-term bonds or short-term bonds? Explain.