Consider two bonds, a 3-year bond paying an annual coupon of 4% and a 10-year bond also with an annual coupon of 4%. Both currently sell at a face value of $1,000.

a. Which bond is more likely to have a better credit rating? (hint: what are the discount rates used for those two bonds? ) explain your answer. b. Now suppose interest rates (i.e. discount rate) rise to 6%. What is the new price of the 3-year bonds? What is the new price of the 10-year bonds? c. Which bonds are more sensitive to a change in interest rates?

Show your calculation steps and keep two decimal places. If you use a financial calculator, tell me your inputs and output (N, i/Y, PMT. PV, FV)