Consider the following three bonds, all making annual coupon payments and having five years to maturity: Rating Coupon Price Bond1 B 6.00% $87.53 Bond2 BBB 6.00% $105.27 Bond3 AA 3.00% $94.33 i. Briefly (one sentence) describe a possible reason by Bond1 and Bond2 pay the same coupon now, despite the difference in their credit ratings. ii. What is the yield to maturity on each of the three bonds, given their current prices? iii. Suppose that the table below gives the appropriate expected returns for bonds maturing in five years of each credit rating. AAA AA A BBB BB B 4.27% 4.52% 4.94% 5.47% 6.72% 8.67% What is the "fair" price of each bond? iv. What is your investment recommendation?

i. Briefly (one sentence) describe a possible reason by Bond1 and Bond2 pay the same coupon now, despite the difference in their credit ratings