Currently, the yield to maturity (YTM) of 1 year bond is 8% and YTM of 2 year bond is 8.9954%. What is the forward rate of the second period?

a. 7%

b. 8%

c. 9%

d. 10%

e. 11%

True or false? Explain.

1) All else the same, bond prices and coupon rates are inversely related.

2) For two bonds identical but for coupon, the market price of the higher coupon bond will change more (in percentage terms) than that of the lower coupon bond for a given change in market interest rates.