Consider the following two bonds: a 5-year and a 10-year bond, each with a 7% coupon. Both bonds currently sell at par and coupon payments are made annually (i.e., one coupon payment per year).

(a) Which bond do you expect to have a greater percentage change in price if interest rates change? Explain why.

Suppose you buy the 10-year bond. One year later, interest rates increase to 9%.

(b) What will be the new price of the bond?

(c) What rate of return would you have earned on the bond?