Consider two treasury bonds, A and B. Both mature in 10 years and both are priced now to have the same yield to maturity. Bond A is a zero coupon bond while bond B has an annual coupon rate of 4%.

(a) Suppose bond A is trading at a price of $82 per $100 face value, what is its yield to maturity? (hint: for a zero coupon bond, yield can be easily solved because bond price only has one term)

(b) Price bond B by using the yield to maturity you computed from (a) since bond B has the same yield to maturity as described in the problem.

(c) You and your friend both want to invest in 10 year treasuries and you both intend to hold them to maturity. Suppose that you invested in bond A while your friend invested in bond B by paying the respective prices in the market. Suppose the yield to maturity of the bonds is expected to stay at the same as todayis level over the next 10 years, what is your average annual return over the 10 years? What is your friendis? You need to justify your answers.

(d) Suppose the yield to maturity is expected to rise steadily from todayis level over the ensuing 10 years, What is your average annual return over the 10 years? Does it dier from your answer to (c)? What about your friendis? Is your friendis average annual return over the 10 years in this situation higher or lower than yours? Explain.